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Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Flügger group A/S (CPH:FLUG B) does use debt in its business. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Flügger group
How Much Debt Does Flügger group Carry?
As you can see below, at the end of July 2020, Flügger group had kr.16.0m of debt, up from kr.1.30m a year ago. Click the image for more detail. However, its balance sheet shows it holds kr.229.0m in cash, so it actually has kr.213.0m net cash.
A Look At Flügger group's Liabilities
The latest balance sheet data shows that Flügger group had liabilities of kr.545.0m due within a year, and liabilities of kr.339.0m falling due after that. On the other hand, it had cash of kr.229.0m and kr.365.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.290.0m.
Given Flügger group has a market capitalization of kr.1.53b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Flügger group boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Flügger group grew its EBIT by 176% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Flügger group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Flügger group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Flügger group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
While Flügger group does have more liabilities than liquid assets, it also has net cash of kr.213.0m. And it impressed us with free cash flow of kr.247m, being 140% of its EBIT. So we don't think Flügger group's use of debt is 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. For example, we've discovered 2 warning signs for Flügger group that you should be aware of before investing here.
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.
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This article by Simply Wall St is general in nature. 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.
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About CPSE:FLUG B
Flügger group
Designs, manufactures, and markets decorative paints, wood preservatives, fillers, wallpapers, and painting tools.
Excellent balance sheet, good value and pays a dividend.
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