Does Thermador Groupe (EPA:THEP) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Thermador Groupe SA (EPA:THEP) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Thermador Groupe

What Is Thermador Groupe's Net Debt?

The image below, which you can click on for greater detail, shows that Thermador Groupe had debt of €32.7m at the end of June 2021, a reduction from €47.5m over a year. But it also has €37.3m in cash to offset that, meaning it has €4.64m net cash.

How Strong Is Thermador Groupe's Balance Sheet?

According to the last reported balance sheet, Thermador Groupe had liabilities of €135.3m due within 12 months, and liabilities of €29.7m due beyond 12 months. On the other hand, it had cash of €37.3m and €124.4m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Thermador Groupe's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €925.3m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Thermador Groupe also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Thermador Groupe grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Thermador Groupe's ability to maintain a healthy balance sheet going forward. 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 Thermador Groupe 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. During the last three years, Thermador Groupe produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Thermador Groupe has €4.64m in net cash. And we liked the look of last year's 45% year-on-year EBIT growth. So we don't think Thermador Groupe's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Thermador Groupe's earnings per share history for free.

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.

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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