The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Südzucker AG (ETR:SZU) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
How Much Debt Does Südzucker Carry?
As you can see below, at the end of August 2019, Südzucker had €1.65b of debt, up from €1.51b a year ago. Click the image for more detail. On the flip side, it has €586.5m in cash leading to net debt of about €1.07b.
A Look At Südzucker's Liabilities
Zooming in on the latest balance sheet data, we can see that Südzucker had liabilities of €1.34b due within 12 months and liabilities of €2.81b due beyond that. On the other hand, it had cash of €586.5m and €1.12b worth of receivables due within a year. So it has liabilities totalling €2.45b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of €2.57b, so it does suggest shareholders should keep an eye on Südzucker's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Südzucker'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.
In the last year Südzucker had negative earnings before interest and tax, and actually shrunk its revenue by 5.3%, to €6.6b. That's not what we would hope to see.
Over the last twelve months Südzucker produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €69m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €222m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Südzucker's profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.