centrotherm international (FRA:CTNK) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, centrotherm international AG (FRA:CTNK) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for centrotherm international

What Is centrotherm international's Net Debt?

The chart below, which you can click on for greater detail, shows that centrotherm international had €16.9m in debt in December 2022; about the same as the year before. However, it does have €64.1m in cash offsetting this, leading to net cash of €47.2m.

A Look At centrotherm international's Liabilities

We can see from the most recent balance sheet that centrotherm international had liabilities of €169.5m falling due within a year, and liabilities of €19.0m due beyond that. Offsetting these obligations, it had cash of €64.1m as well as receivables valued at €15.3m due within 12 months. So it has liabilities totalling €109.1m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €112.2m, so it does suggest shareholders should keep an eye on centrotherm international's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, centrotherm international also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that centrotherm international grew its EBIT by 276% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is centrotherm international's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While centrotherm international 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. Happily for any shareholders, centrotherm international actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While centrotherm international does have more liabilities than liquid assets, it also has net cash of €47.2m. And it impressed us with free cash flow of €28m, being 255% of its EBIT. So we are not troubled with centrotherm international's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that centrotherm international is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.