Does MVV Energie (ETR:MVV1) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that MVV Energie AG (ETR:MVV1) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MVV Energie

How Much Debt Does MVV Energie Carry?

As you can see below, MVV Energie had €1.78b of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds €1.89b in cash, so it actually has €115.3m net cash.

A Look At MVV Energie's Liabilities

Zooming in on the latest balance sheet data, we can see that MVV Energie had liabilities of €15.9b due within 12 months and liabilities of €6.00b due beyond that. Offsetting this, it had €1.89b in cash and €773.0m in receivables that were due within 12 months. So it has liabilities totalling €19.2b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €2.10b 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'd watch its balance sheet closely, without a doubt. At the end of the day, MVV Energie would probably need a major re-capitalization if its creditors were to demand repayment. Given that MVV Energie 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since MVV Energie will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year MVV Energie wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to €5.9b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is MVV Energie?

Although MVV Energie had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €660m. 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. One positive was the revenue growth of 40% over the last year. But we genuinely do think the balance sheet is a risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for MVV Energie you should be aware of, and 1 of them is a bit concerning.

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.