Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu doesn’t care when he says, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital ”. So it might be obvious, then, that you need to factor in debt, when you think about how risky a given stock is because too much debt can sink a business. We can see that Boutique Apotheke Europe NV (ETR: SAE) uses debt in its activities. But should shareholders be worried about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting shareholders because lenders are forcing them to raise capital at a difficult price. Of course, debt can be an important tool in businesses, especially large cap companies. When we look at debt levels, we first look at cash and debt levels, together.
Check out our latest review for Shop Apotheke Europe
What is Shop Apotheke Europe’s net debt?
As you can see below, Shop Apotheke Europe had € 4.12 million in debt in December 2020, up from € 142.8 million the year before. However, his balance sheet shows that he has € 128.3 million in cash, so in reality € 124.1 million in net cash.
A look at the responsibilities of Shop Apotheke Europe
The latest balance sheet data shows Shop Apotheke Europe had liabilities of 74.6 million euros within one year and liabilities of 37.2 million euros due thereafter. In return for these obligations, it has cash of € 128.3 million as well as receivables valued at € 30.0 million within 12 months. It can therefore boast of having € 46.5 million in liquid assets more than total Liabilities.
Considering the size of Shop Apotheke Europe, it appears that its liquidity is well balanced with its total liabilities. So while it’s hard to imagine the 3.62 billion dollar company struggling to make cash, we still think it’s worth watching its balance sheet. Put simply, the fact that Shop Apotheke Europe has more cash than debt is arguably a good indication that it can safely manage its debt.
In particular, Shop Apotheke Europe recorded a loss in EBIT level last year, but improved this result to reach a positive EBIT of 5.6 million euros in the last twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Shop Apotheke Europe can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, while the tax authorities love accounting profits, lenders only accept cash. While Shop Apotheke Europe has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building. (or erode) that cash balance. Over the past year, Shop Apotheke Europe has experienced substantial negative free cash flow, in total. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.
While we sympathize with investors who find debt worrying, you should keep in mind that Shop Apotheke Europe has net cash of EUR 124.1 million, as well as more liquid assets than liabilities. So if Shop Apotheke Europe doesn’t have a good track record, it’s certainly not bad. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for Shop Apotheke Europe that you need to be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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