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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Klassik Radio AG (ETR:KA8) makes use of debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Klassik Radio
How Much Debt Does Klassik Radio Carry?
As you can see below, Klassik Radio had €12.0k of debt at June 2019, down from €362.0k a year prior. But on the other hand it also has €2.09m in cash, leading to a €2.08m net cash position.
How Strong Is Klassik Radio's Balance Sheet?
According to the last reported balance sheet, Klassik Radio had liabilities of €4.58m due within 12 months, and liabilities of €169.0k due beyond 12 months. Offsetting these obligations, it had cash of €2.09m as well as receivables valued at €3.44m due within 12 months. So it can boast €777.0k more liquid assets than total liabilities.
This short term liquidity is a sign that Klassik Radio could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Klassik Radio has more cash than debt is arguably a good indication that it can manage its debt safely.
Better yet, Klassik Radio grew its EBIT by 117% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Klassik Radio can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Klassik Radio 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, Klassik Radio produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.