Health Check: How Prudently Does Stemmer Imaging (ETR:S9I) Use Debt?

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 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. As with many other companies Stemmer Imaging AG (ETR:S9I) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Stemmer Imaging

How Much Debt Does Stemmer Imaging Carry?

The image below, which you can click on for greater detail, shows that Stemmer Imaging had debt of €8.01m at the end of September 2020, a reduction from €10.2m over a year. However, its balance sheet shows it holds €32.2m in cash, so it actually has €24.2m net cash.

How Strong Is Stemmer Imaging's Balance Sheet?

The latest balance sheet data shows that Stemmer Imaging had liabilities of €18.7m due within a year, and liabilities of €11.0m falling due after that. On the other hand, it had cash of €32.2m and €14.2m worth of receivables due within a year. So it can boast €16.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Stemmer Imaging could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Stemmer Imaging boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Stemmer Imaging'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.

Over 12 months, Stemmer Imaging made a loss at the EBIT level, and saw its revenue drop to €113m, which is a fall of 2.3%. That's not what we would hope to see.

So How Risky Is Stemmer Imaging?

While Stemmer Imaging lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €3.4m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Stemmer Imaging 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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