Is Fenix Outdoor International (STO:FOI B) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Fenix Outdoor International AG (STO:FOI B) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Fenix Outdoor International

How Much Debt Does Fenix Outdoor International Carry?

You can click the graphic below for the historical numbers, but it shows that Fenix Outdoor International had €33.9m of debt in March 2022, down from €55.0m, one year before. But it also has €137.6m in cash to offset that, meaning it has €103.7m net cash.

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 €127.3m due within 12 months and liabilities of €134.2m due beyond that. Offsetting this, it had €137.6m in cash and €67.8m in receivables that were due within 12 months. So it has liabilities totalling €56.1m more than its cash and near-term receivables, combined.

Since publicly traded Fenix Outdoor International shares are worth a total of €1.15b, it seems unlikely that this level of liabilities would be a major 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!

Another good sign is that Fenix Outdoor International has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Fenix Outdoor International generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd 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 €103.7m. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in €89m. So we don't think Fenix Outdoor International's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Fenix Outdoor International has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.