Stemmer Imaging (ETR:S9I) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Stemmer Imaging AG (ETR:S9I) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Stemmer Imaging

What Is Stemmer Imaging's Net Debt?

The image below, which you can click on for greater detail, shows that Stemmer Imaging had debt of €6.00m at the end of September 2021, a reduction from €8.01m over a year. However, its balance sheet shows it holds €17.0m in cash, so it actually has €11.0m net cash.

A Look At Stemmer Imaging's Liabilities

The latest balance sheet data shows that Stemmer Imaging had liabilities of €28.6m due within a year, and liabilities of €8.01m falling due after that. Offsetting this, it had €17.0m in cash and €40.5m in receivables that were due within 12 months. So it can boast €20.9m 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. Simply put, the fact that Stemmer Imaging has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Stemmer Imaging made a loss at the EBIT level, last year, it was also good to see that it generated €18m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 year, Stemmer Imaging produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Stemmer Imaging has net cash of €11.0m, as well as more liquid assets than liabilities. So we don't think Stemmer Imaging's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Stemmer Imaging that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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

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.