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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fenix Outdoor International

How Much Debt Does Fenix Outdoor International Carry?

As you can see below, Fenix Outdoor International had €34.8m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds €37.7m in cash, so it actually has €2.90m net cash.

How Strong Is Fenix Outdoor International's Balance Sheet?

According to the last reported balance sheet, Fenix Outdoor International had liabilities of €134.4m due within 12 months, and liabilities of €129.7m due beyond 12 months. Offsetting this, it had €37.7m in cash and €82.4m in receivables that were due within 12 months. So its liabilities total €144.0m more than the combination of its cash and short-term receivables.

Since publicly traded Fenix Outdoor International shares are worth a total of €925.4m, 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.

On the other hand, Fenix Outdoor International saw its EBIT drop by 4.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Fenix Outdoor International produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Fenix Outdoor International does have more liabilities than liquid assets, it also has net cash of €2.90m. So we are not troubled with Fenix Outdoor International's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Fenix Outdoor International is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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.