Is Fernheizwerk Neukölln (FRA:FHW) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Fernheizwerk Neukölln Aktiengesellschaft (FRA:FHW) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fernheizwerk Neukölln

What Is Fernheizwerk Neukölln's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Fernheizwerk Neukölln had €7.00m of debt, an increase on none, over one year. However, it does have €9.47m in cash offsetting this, leading to net cash of €2.47m.

How Strong Is Fernheizwerk Neukölln's Balance Sheet?

According to the last reported balance sheet, Fernheizwerk Neukölln had liabilities of €8.46m due within 12 months, and liabilities of €27.5m due beyond 12 months. On the other hand, it had cash of €9.47m and €5.42m worth of receivables due within a year. So its liabilities total €21.1m more than the combination of its cash and short-term receivables.

Fernheizwerk Neukölln has a market capitalization of €85.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Fernheizwerk Neukölln also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Fernheizwerk Neukölln 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 Fernheizwerk Neukölln wasn't profitable at an EBIT level, but managed to grow its revenue by 44%, to €60m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Fernheizwerk Neukölln?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Fernheizwerk Neukölln had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €7.1m of cash and made a loss of €321k. With only €2.47m on the balance sheet, it would appear that its going to need to raise capital again soon. Fernheizwerk Neukölln's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 3 warning signs for Fernheizwerk Neukölln you should be aware of, and 1 of them makes us a bit uncomfortable.

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.