These 4 Measures Indicate That FORTEC Elektronik (ETR:FEV) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that FORTEC Elektronik AG (ETR:FEV) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for FORTEC Elektronik

What Is FORTEC Elektronik's Debt?

As you can see below, FORTEC Elektronik had €3.24m of debt at September 2021, down from €4.40m a year prior. However, its balance sheet shows it holds €15.4m in cash, so it actually has €12.2m net cash.

How Strong Is FORTEC Elektronik's Balance Sheet?

The latest balance sheet data shows that FORTEC Elektronik had liabilities of €11.5m due within a year, and liabilities of €7.71m falling due after that. Offsetting these obligations, it had cash of €15.4m as well as receivables valued at €10.8m due within 12 months. So it can boast €6.96m 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 52% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine FORTEC Elektronik's ability to maintain a healthy balance sheet going forward. 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 generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that FORTEC Elektronik has net cash of €12.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in €9.9m. So we don't think FORTEC Elektronik's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for FORTEC Elektronik you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.