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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Frequentis AG (ETR:FQT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Frequentis
What Is Frequentis's Net Debt?
As you can see below, at the end of December 2018, Frequentis had €10.8m of debt, up from €10.1m a year ago. Click the image for more detail. However, it does have €55.5m in cash offsetting this, leading to net cash of €44.8m.
A Look At Frequentis's Liabilities
Zooming in on the latest balance sheet data, we can see that Frequentis had liabilities of €82.4m due within 12 months and liabilities of €30.0m due beyond that. On the other hand, it had cash of €55.5m and €93.7m worth of receivables due within a year. So it actually has €37.0m more liquid assets than total liabilities.
It's good to see that Frequentis has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Frequentis boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Frequentis grew its EBIT by 9.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Frequentis'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. Frequentis 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, Frequentis generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.