Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Shop Apotheke Europe N.V. (ETR:SAE) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Shop Apotheke Europe
How Much Debt Does Shop Apotheke Europe Carry?
As you can see below, at the end of June 2019, Shop Apotheke Europe had €141.9m of debt, up from €4.77m a year ago. Click the image for more detail. But on the other hand it also has €158.1m in cash, leading to a €16.2m net cash position.
How Healthy Is Shop Apotheke Europe's Balance Sheet?
We can see from the most recent balance sheet that Shop Apotheke Europe had liabilities of €72.3m falling due within a year, and liabilities of €137.7m due beyond that. Offsetting these obligations, it had cash of €158.1m as well as receivables valued at €29.2m due within 12 months. So it has liabilities totalling €22.6m more than its cash and near-term receivables, combined.
Of course, Shop Apotheke Europe has a market capitalization of €397.9m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Shop Apotheke Europe also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shop Apotheke Europe can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.