Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL) appears to be using debt sensibly

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL) uses debt. But should shareholders worry about its use of debt?

Why is debt risky?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest review for Kulmbacher Brauerei Aktien-Gesellschaft

How much debt does the Kulmbacher Brauerei Aktien-Gesellschaft bear?

The image below, which you can click on for more details, shows that in June 2022 the Kulmbacher Brauerei Aktien-Gesellschaft had a debt of 18.9 million euros, compared to 4.44 million euros in one year. However, his balance sheet shows that he holds €19.9m in cash, so he actually has €1.01m in net cash.

MUN:KUL Debt to Equity August 31, 2022

How healthy is Kulmbacher Brauerei Aktien-Gesellschaft’s balance sheet?

According to the last published balance sheet, Kulmbacher Brauerei Aktien-Gesellschaft had liabilities of €86.6 million maturing within 12 months and liabilities of €72.1 million maturing beyond 12 months. In return for these bonds, it had cash of €19.9 million as well as receivables worth €39.6 million maturing in less than 12 months. It therefore has liabilities totaling 99.2 million euros more than its cash and short-term receivables, combined.

This shortfall is not that bad as Kulmbacher Brauerei Aktien-Gesellschaft is worth €268.8 million and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt. Although it has liabilities worth noting, Kulmbacher Brauerei Aktien-Gesellschaft also has more cash than debt, so we’re pretty confident it can safely manage its debt.

While Kulmbacher Brauerei Aktien-Gesellschaft doesn’t seem to have gained much on the EBIT line, at least earnings are holding steady for now. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Kulmbacher Brauerei Aktien-Gesellschaft will need income to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, a company can only repay its debts with cold hard cash, not with book profits. Although Kulmbacher Brauerei Aktien-Gesellschaft has net cash on its balance sheet, it is always interesting to examine its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it builds (or erodes) this cash balance. Fortunately for all shareholders, Kulmbacher Brauerei Aktien-Gesellschaft has actually produced more free cash flow than EBIT over the past three years. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summary

If the Kulmbacher Brauerei Aktien-Gesellschaft has more liabilities than liquid assets, it also has a net cash position of 1.01 million euros. And he impressed us with a free cash flow of 13 million euros, or 145% of his EBIT. We therefore have no problem with the use of debt by the Kulmbacher Brauerei Aktien-Gesellschaft. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 4 warning signs for Kulmbacher Brauerei Aktien-Gesellschaft you should be aware, and 1 of them is a bit unpleasant.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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