Shop Apotheke Europe (ETR:SAE) Has A Somewhat Strained Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shop Apotheke Europe N.V. (ETR:SAE) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shop Apotheke Europe

What Is Shop Apotheke Europe's Net Debt?

As you can see below, Shop Apotheke Europe had €4.12m of debt at December 2020, down from €142.8m a year prior. However, its balance sheet shows it holds €128.3m in cash, so it actually has €124.1m net cash.

A Look At Shop Apotheke Europe's Liabilities

The latest balance sheet data shows that Shop Apotheke Europe had liabilities of €74.6m due within a year, and liabilities of €37.2m falling due after that. Offsetting these obligations, it had cash of €128.3m as well as receivables valued at €30.0m due within 12 months. So it can boast €46.5m 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 €3.62b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Shop Apotheke Europe has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Shop Apotheke Europe made a loss at the EBIT level, last year, but improved that to positive EBIT of €5.6m in the last twelve months. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shop Apotheke Europe has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Shop Apotheke Europe saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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 €124.1m, as well as more liquid assets than liabilities. So while Shop Apotheke Europe does not have a great balance sheet, it's certainly not too bad. 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 instance, we've identified 2 warning signs for Shop Apotheke Europe that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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