Fenix Outdoor International (STO:FOI B) Could Easily Take On More Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Fenix Outdoor International AG (STO:FOI B) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is Fenix Outdoor International's Debt?

You can click the graphic below for the historical numbers, but it shows that Fenix Outdoor International had €29.3m of debt in September 2022, down from €38.4m, one year before. However, it does have €68.9m in cash offsetting this, leading to net cash of €39.6m.

How Strong Is Fenix Outdoor International's Balance Sheet?

We can see from the most recent balance sheet that Fenix Outdoor International had liabilities of €139.2m falling due within a year, and liabilities of €124.9m due beyond that. Offsetting these obligations, it had cash of €68.9m as well as receivables valued at €96.8m due within 12 months. So its liabilities total €98.4m more than the combination of its cash and short-term receivables.

Given Fenix Outdoor International has a market capitalization of €1.10b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Fenix Outdoor International boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Fenix Outdoor International grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fenix Outdoor International'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, Fenix Outdoor International recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Fenix Outdoor International's liabilities, but we can be reassured by the fact it has has net cash of €39.6m. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in €8.2m. So we don't think Fenix Outdoor International's use of debt is risky. 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 1 warning sign with Fenix Outdoor International , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.