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.' 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. We note that Fenix Outdoor International AG (STO:FOI B) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out the opportunities and risks within the SE Specialty Retail industry.

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 €31.6m of debt in June 2022, down from €40.7m, one year before. However, its balance sheet shows it holds €86.8m in cash, so it actually has €55.2m 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 €125.0m due within 12 months and liabilities of €125.6m due beyond that. On the other hand, it had cash of €86.8m and €61.8m worth of receivables due within a year. So its liabilities total €102.0m more than the combination of its cash and short-term receivables.

Of course, Fenix Outdoor International has a market capitalization of €1.01b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 23% in twelve months, making it easier to pay down debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Fenix Outdoor International's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €55.2m. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in €41m. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Fenix Outdoor International 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.

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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.