Here's Why Waberer's International Nyrt (BST:3WB) Can Manage Its Debt Responsibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Waberer's International Nyrt. (BST:3WB) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 Waberer's International Nyrt

What Is Waberer's International Nyrt's Net Debt?

As you can see below, at the end of June 2023, Waberer's International Nyrt had €113.0m of debt, up from €43.1m a year ago. Click the image for more detail. But on the other hand it also has €119.0m in cash, leading to a €6.00m net cash position.

A Look At Waberer's International Nyrt's Liabilities

According to the last reported balance sheet, Waberer's International Nyrt had liabilities of €203.1m due within 12 months, and liabilities of €332.5m due beyond 12 months. Offsetting these obligations, it had cash of €119.0m as well as receivables valued at €116.1m due within 12 months. So its liabilities total €300.5m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €98.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Waberer's International Nyrt would likely require a major re-capitalisation if it had to pay its creditors today. Given that Waberer's International Nyrt has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

In addition to that, we're happy to report that Waberer's International Nyrt has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Waberer's International Nyrt'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Waberer's International Nyrt 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. Happily for any shareholders, Waberer's International Nyrt actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Waberer's International Nyrt's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €6.00m. And it impressed us with free cash flow of €45m, being 214% of its EBIT. So we are not troubled with Waberer's International Nyrt's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Waberer's International Nyrt you should be aware of.

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.