Is Fenix Outdoor International (STO:FOI B) Using Too Much Debt?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Fenix Outdoor International
How Much Debt Does Fenix Outdoor International Carry?
As you can see below, Fenix Outdoor International had €25.6m of debt at June 2019, down from €41.5m a year prior. But on the other hand it also has €48.9m in cash, leading to a €23.3m net cash position.
How Strong Is Fenix Outdoor International's Balance Sheet?
The latest balance sheet data shows that Fenix Outdoor International had liabilities of €115.8m due within a year, and liabilities of €89.4m falling due after that. On the other hand, it had cash of €48.9m and €54.8m worth of receivables due within a year. So its liabilities total €101.5m more than the combination of its cash and short-term receivables.
Since publicly traded Fenix Outdoor International shares are worth a total of €1.29b, 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. Despite its noteworthy liabilities, Fenix Outdoor International boasts net cash, so it's fair to say it does not have a heavy debt load!
Fenix Outdoor International's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 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. Looking at the most recent three years, Fenix Outdoor International recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
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 €23m. So we don't have any problem with Fenix Outdoor International's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Fenix Outdoor International, you may well want to click here to check an interactive graph of its earnings per share history.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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