Here's Why CEWE Stiftung KGaA (ETR:CWC) Can Manage Its Debt Responsibly
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. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, CEWE Stiftung & Co. KGaA (ETR:CWC) does carry debt. But the more important question is: how much risk is that debt creating?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for CEWE Stiftung KGaA
What Is CEWE Stiftung KGaA's Debt?
You can click the graphic below for the historical numbers, but it shows that CEWE Stiftung KGaA had €1.95m of debt in December 2019, down from €3.81m, one year before. But on the other hand it also has €32.4m in cash, leading to a €30.4m net cash position.
How Healthy Is CEWE Stiftung KGaA's Balance Sheet?
We can see from the most recent balance sheet that CEWE Stiftung KGaA had liabilities of €202.1m falling due within a year, and liabilities of €95.4m due beyond that. Offsetting these obligations, it had cash of €32.4m as well as receivables valued at €102.1m due within 12 months. So it has liabilities totalling €163.0m more than its cash and near-term receivables, combined.
CEWE Stiftung KGaA has a market capitalization of €652.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, CEWE Stiftung KGaA boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, CEWE Stiftung KGaA grew its EBIT by 6.8% in the last year, making that debt load look even more manageable. 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 CEWE Stiftung KGaA'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. CEWE Stiftung KGaA 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, CEWE Stiftung KGaA produced sturdy free cash flow equating to 59% 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 CEWE Stiftung KGaA does have more liabilities than liquid assets, it also has net cash of €30.4m. So we don't have any problem with CEWE Stiftung KGaA's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of CEWE Stiftung KGaA's earnings per share history for free.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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. 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. Thank you for reading.
