Stemmer Imaging (ETR:S9I) Has A Rock Solid Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Stemmer Imaging AG (ETR:S9I) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Stemmer Imaging

What Is Stemmer Imaging's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Stemmer Imaging had €4.50m of debt in June 2022, down from €6.51m, one year before. However, it does have €33.1m in cash offsetting this, leading to net cash of €28.6m.

A Look At Stemmer Imaging's Liabilities

According to the last reported balance sheet, Stemmer Imaging had liabilities of €24.4m due within 12 months, and liabilities of €7.08m due beyond 12 months. On the other hand, it had cash of €33.1m and €23.5m worth of receivables due within a year. So it actually has €25.1m more liquid assets than total liabilities.

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

And we also note warmly that Stemmer Imaging grew its EBIT by 11% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Stemmer Imaging 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, 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. During the last two years, Stemmer Imaging produced sturdy free cash flow equating to 58% 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 we empathize with investors who find debt concerning, you should keep in mind that Stemmer Imaging has net cash of €28.6m, as well as more liquid assets than liabilities. So we don't think Stemmer Imaging's use of debt is risky. 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. We've identified 1 warning sign with Stemmer Imaging , and understanding them should be part of your investment process.

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.