Does Fenix Outdoor International (STO:FOI B) 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 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. We note that Fenix Outdoor International AG (STO:FOI B) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for Fenix Outdoor International

How Much Debt Does Fenix Outdoor International Carry?

As you can see below, at the end of September 2021, Fenix Outdoor International had €38.4m of debt, up from €21.6m a year ago. Click the image for more detail. However, it does have €123.1m in cash offsetting this, leading to net cash of €84.7m.

How Strong Is Fenix Outdoor International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fenix Outdoor International had liabilities of €128.9m due within 12 months and liabilities of €146.0m due beyond that. Offsetting this, it had €123.1m in cash and €84.5m in receivables that were due within 12 months. So it has liabilities totalling €67.3m more than its cash and near-term receivables, combined.

Of course, Fenix Outdoor International has a market capitalization of €1.55b, 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, Fenix Outdoor International also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Fenix Outdoor International grew its EBIT by 12% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fenix Outdoor International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fenix Outdoor International 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. During the last three years, Fenix Outdoor International generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Fenix Outdoor International has €84.7m in net cash. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in €80m. So is Fenix Outdoor International's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Fenix Outdoor International , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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