Manitou BF (EPA:MTU) Has A Pretty Healthy Balance Sheet

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.' 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 note that Manitou BF SA (EPA:MTU) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Manitou BF

How Much Debt Does Manitou BF Carry?

You can click the graphic below for the historical numbers, but it shows that Manitou BF had €176.6m of debt in June 2021, down from €275.2m, one year before. However, it does have €189.2m in cash offsetting this, leading to net cash of €12.7m.

How Strong Is Manitou BF's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Manitou BF had liabilities of €481.3m due within 12 months and liabilities of €214.3m due beyond that. Offsetting this, it had €189.2m in cash and €356.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €149.9m.

Of course, Manitou BF has a market capitalization of €1.11b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Manitou BF also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Manitou BF has boosted its EBIT by 60%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Manitou BF can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Manitou BF 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. Looking at the most recent three years, Manitou BF recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although Manitou BF's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €12.7m. And it impressed us with its EBIT growth of 60% over the last year. So is Manitou BF's debt a risk? It doesn't seem so to us. 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. Be aware that Manitou BF is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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