Fenix Outdoor International (STO:FOI B) Has A Rock Solid 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. As with many other companies Fenix Outdoor International AG (STO:FOI B) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, 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

How Much Debt Does Fenix Outdoor International Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Fenix Outdoor International had debt of €40.7m, up from €22.1m in one year. However, its balance sheet shows it holds €133.3m in cash, so it actually has €92.6m net cash.

How Healthy Is Fenix Outdoor International's Balance Sheet?

According to the last reported balance sheet, Fenix Outdoor International had liabilities of €108.4m due within 12 months, and liabilities of €147.6m due beyond 12 months. Offsetting this, it had €133.3m in cash and €56.0m in receivables that were due within 12 months. So it has liabilities totalling €66.7m more than its cash and near-term receivables, combined.

Since publicly traded Fenix Outdoor International shares are worth a total of €1.60b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 13% last year, making its debt load easier to handle. 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 Fenix Outdoor International 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, 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 78% 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 €92.6m. And it impressed us with free cash flow of €81m, being 78% of its EBIT. 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. For example, we've discovered 1 warning sign for Fenix Outdoor International that you should be aware of before investing here.

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.

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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.
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