Is Stemmer Imaging (ETR:S9I) 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.' 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. As with many other companies Stemmer Imaging AG (ETR:S9I) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Stemmer Imaging

How Much Debt Does Stemmer Imaging Carry?

As you can see below, Stemmer Imaging had €6.67m of debt at March 2024, down from €9.13m a year prior. However, its balance sheet shows it holds €45.7m in cash, so it actually has €39.1m net cash.

How Healthy Is Stemmer Imaging's Balance Sheet?

According to the last reported balance sheet, Stemmer Imaging had liabilities of €17.8m due within 12 months, and liabilities of €5.70m due beyond 12 months. Offsetting this, it had €45.7m in cash and €17.0m in receivables that were due within 12 months. So it can boast €39.2m 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. Simply put, the fact that Stemmer Imaging has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Stemmer Imaging's EBIT dived 19%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Stemmer Imaging 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. Over the last three years, Stemmer Imaging recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Stemmer Imaging has €39.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €23m, being 80% of its EBIT. So is Stemmer Imaging's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Stemmer Imaging you should be aware of, and 1 of them can't be ignored.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com