Is FORTEC Elektronik (ETR:FEV) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, FORTEC Elektronik AG (ETR:FEV) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for FORTEC Elektronik

What Is FORTEC Elektronik's Net Debt?

You can click the graphic below for the historical numbers, but it shows that FORTEC Elektronik had €1.53m of debt in September 2023, down from €2.07m, one year before. But it also has €14.8m in cash to offset that, meaning it has €13.3m net cash.

A Look At FORTEC Elektronik's Liabilities

According to the last reported balance sheet, FORTEC Elektronik had liabilities of €13.5m due within 12 months, and liabilities of €6.39m due beyond 12 months. Offsetting this, it had €14.8m in cash and €13.4m in receivables that were due within 12 months. So it can boast €8.39m more liquid assets than total liabilities.

This surplus suggests that FORTEC Elektronik has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, FORTEC Elektronik boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, FORTEC Elektronik grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if FORTEC Elektronik 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, a company can only pay off debt with cold hard cash, not accounting profits. FORTEC Elektronik 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. During the last three years, FORTEC Elektronik produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case FORTEC Elektronik has €13.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 50% year-on-year EBIT growth. So we don't think FORTEC Elektronik's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - FORTEC Elektronik has 1 warning sign 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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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.