Warren Buffett once said, “Volatility is far from synonymous with risk.” It is only natural to consider a company’s balance sheet when examining how risky it is, as a company is often associated with debt when it collapses. We find that Müller – The purple logistics SE (ETR:MLL) has debt on its balance sheet. But is this debt a cause for concern for shareholders?

When is debt a problem?

Debt and other liabilities become risky for a company when it cannot easily meet those obligations, either through free cash flow or by raising capital at an attractive price. If the company can’t meet its legal obligations to repay the debt, shareholders could end up empty-handed. A more common (but still costly) case, however, is when a company must issue shares at bargain prices, permanently diluting the shareholder base, just to shore up its balance sheet. However, the most common situation is when a company manages its debt reasonably well – and to its own advantage. The first step in looking at a company’s debt levels is to look at its cash and debt together.

Check out our latest analysis of Müller – Die lila Logistik

How high is the net debt of Müller – Die lila Logistik?

The chart below, which you can click on for more details, shows that Müller – Die lila Logistik had €53.0 million in debt in June 2024; roughly the same as the year before. However, the company also had €11.5 million in cash, so net debt is €41.5 million.

How strong is the balance sheet of Müller – Die lila Logistik?

Taking a closer look at the latest balance sheet data, we can see that Müller – Die lila Logistik has liabilities of €59.7 million with a maturity of 12 months and accounts payable of €109.3 million with a maturity beyond that. On the other hand, the company has cash of €11.5 million and accounts receivable of €29.7 million with a maturity of one year. So, total liabilities are €127.9 million more than cash and short-term receivables combined.

The deficiency identified here weighs as heavily on the €49.7 million company itself as if a child were struggling under the weight of a huge backpack full of books, its sports equipment and a trumpet. We therefore believe that shareholders should keep a close eye on this. Ultimately, Müller – Die lila Logistik would probably have to undertake a major recapitalization if its creditors were to demand repayment.

We use two main ratios to inform us about debt to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second tells us how much earnings before interest and taxes (EBIT) covers interest expenses (or interest cover for short). So we look at debt to earnings both with and without depreciation and amortization expenses.

While Müller – Die lila Logistik’s debt ratio (2.9) suggests that the company is using debt, its interest cover is very weak at 1.2, suggesting a high level of debt. That’s largely due to the company’s significant depreciation and amortisation expenses, which arguably mean that its EBITDA is a very generous measure of profit, and its debt might be a bigger burden than it first appears. So shareholders should probably be aware that interest expenses have apparently been a big drag on the business recently. One positive factor for Müller – Die lila Logistik is that the company turned last year’s EBIT loss into a profit of €6.0m over the last twelve months. There’s no doubt that we learn the most about debt from the balance sheet. But it’s Müller – Die lila Logistik’s profits that will influence how the balance sheet performs going forward, so if you’re interested in learning more about its profits, it might be worth looking at this graph of its long term profit trend.

And finally: While the tax authorities love accounting profits, lenders only accept cash. So it’s worth checking how much of the earnings before interest and taxes (EBIT) is covered by free cash flow. Fortunately for all shareholders, Müller – Die lila Logistik actually generated more free cash flow than EBIT last year. Such strong cash conversion excites us just as much as the crowd does when the beat starts at a Daft Punk concert.

Our view

At first glance, Müller – Die lila Logistik’s interest coverage made us skeptical about the stock, and the level of total liabilities was no more enticing than that one empty restaurant on the busiest night of the year. But on the bright side, its conversion of EBIT to free cash flow is a good sign and makes us more optimistic. Overall, we think it’s fair to say that Müller – Die lila Logistik has enough debt that there are some real risks related to the balance sheet. If all goes well, that should boost returns, but on the other hand, the debt increases the risk of permanent capital loss. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, any company can contain risks that exist outside the balance sheet. Note that Müller – Die lila Logistik 3 warning signals in our investment analysis and we don’t like two of them so much…

Of course, if you’re one of those investors who prefers to buy stocks without the burden of debt, you should discover our exclusive list of net cash growth stocks today.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.