Is Fenix Outdoor International (STO:FOI B) Using Too Much 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.' 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. Importantly, Fenix Outdoor International AG (STO:FOI B) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Fenix Outdoor International

What Is Fenix Outdoor International's Net Debt?

As you can see below, Fenix Outdoor International had €36.1m of debt at December 2021, down from €66.2m a year prior. However, its balance sheet shows it holds €181.9m in cash, so it actually has €145.8m net cash.

How Healthy 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 €143.1m due within 12 months and liabilities of €141.9m due beyond that. Offsetting this, it had €181.9m in cash and €60.2m in receivables that were due within 12 months. So it has liabilities totalling €42.9m more than its cash and near-term receivables, combined.

Of course, Fenix Outdoor International has a market capitalization of €1.21b, 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. Despite its noteworthy liabilities, Fenix Outdoor International boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Fenix Outdoor International grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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. While Fenix Outdoor International 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. Over the last three years, Fenix Outdoor International recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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 €145.8m. And it impressed us with free cash flow of €94m, being 96% of its EBIT. 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. For example - Fenix Outdoor International has 2 warning signs we think you should be aware of.

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.