Fotex Holding (BDL:FTXHG) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Fotex Holding S.E. (BDL:FTXHG) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fotex Holding

What Is Fotex Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that Fotex Holding had €65.2m of debt in December 2020, down from €75.2m, one year before. But on the other hand it also has €85.1m in cash, leading to a €19.9m net cash position.

How Strong Is Fotex Holding's Balance Sheet?

The latest balance sheet data shows that Fotex Holding had liabilities of €13.3m due within a year, and liabilities of €66.0m falling due after that. Offsetting these obligations, it had cash of €85.1m as well as receivables valued at €2.69m due within 12 months. So it actually has €8.51m more liquid assets than total liabilities.

This surplus suggests that Fotex Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Fotex Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly Fotex Holding's EBIT was essentially flat over the last twelve months. We would prefer to see some earnings growth, because that always helps diminish debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Fotex Holding's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fotex Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Fotex Holding actually produced more free cash flow than EBIT. 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 it is always sensible to investigate a company's debt, in this case Fotex Holding has €19.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 152% of that EBIT to free cash flow, bringing in €15m. So is Fotex Holding's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Fotex Holding you should be aware of.

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. 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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