Here's Why Shop Apotheke Europe (ETR:SAE) Has A Meaningful Debt Burden

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Shop Apotheke Europe N.V. (ETR:SAE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shop Apotheke Europe

What Is Shop Apotheke Europe's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Shop Apotheke Europe had €221.6m of debt, an increase on €177.6m, over one year. However, it does have €340.7m in cash offsetting this, leading to net cash of €119.1m.

How Healthy Is Shop Apotheke Europe's Balance Sheet?

We can see from the most recent balance sheet that Shop Apotheke Europe had liabilities of €106.5m falling due within a year, and liabilities of €256.7m due beyond that. Offsetting these obligations, it had cash of €340.7m as well as receivables valued at €42.7m due within 12 months. So it can boast €20.2m more liquid assets than total liabilities.

Having regard to Shop Apotheke Europe's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €2.29b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Shop Apotheke Europe boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Shop Apotheke Europe improved its EBIT from a last year's loss to a positive €4.0m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shop Apotheke Europe can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shop Apotheke Europe may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Shop Apotheke Europe saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Shop Apotheke Europe has net cash of €119.1m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Shop Apotheke Europe's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Shop Apotheke Europe has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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