Heidelberger Druckmaschinen (ETR: HDD) has a somewhat strained record

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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Heidelberger Druckmaschinen Aktiengesellschaft (ETR: HDD) carries the debt. But should shareholders be concerned about its use of debt?

When Is Debt a Problem?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Discover our latest analysis for Heidelberger Druckmaschinen

What is the debt of Heidelberger Druckmaschinen?

The image below, which you can click for more details, shows that Heidelberger Druckmaschinen had a debt of 214.0 million euros at the end of June 2021, a reduction from 464.0 million euros on a year. However, he also had € 173.0 million in cash, so his net debt was € 41.0 million.

XTRA debt history: HDD on equity September 18, 2021

How strong is Heidelberger Druckmaschinen’s balance sheet?

The latest balance sheet data shows that Heidelberger Druckmaschinen had debts of 845.0 million euros due within one year, and debts of 1.23 billion euros due thereafter. In return, he had € 173.0 million in cash and € 355.0 million in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its (short-term) receivables by 1.54 billion euros.

The deficit here weighs heavily on the € 630.0m company itself, as if a child struggles under the weight of a huge backpack full of books, his sports equipment and a trumpet. So we would be watching its record closely, without a doubt. Ultimately, Heidelberger Druckmaschinen would likely need a major recapitalization if his creditors demanded repayment.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization charges.

Heidelberger Druckmaschinen has a very low debt to EBITDA ratio of 0.47 so it is strange to see low interest coverage as last year’s EBIT was only 0.58 times interest expense. So while we are not necessarily alarmed, we think his debt is far from negligible. Notably, Heidelberger Druckmaschinen’s EBIT was higher than Elon Musk’s, gaining a whopping 614% over last year. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately the future profitability of the company will decide whether Heidelberger Druckmaschinen can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. In the past three years, Heidelberger Druckmaschinen has recorded a substantial negative free cash flow in total. While this may be the result of spending on growth, it makes debt much riskier.

Our point of view

At first glance, Heidelberger Druckmaschinen’s conversion of EBIT to free cash flow left us hesitant about the stock, and its total liability level was no more appealing than the single empty restaurant on the busiest night of the week. ‘year. But on the positive side, its EBIT growth rate is a good sign and makes us more optimistic. All in all, it seems to us that Heidelberger Druckmaschinen’s balance sheet is really very risky for the company. For this reason, we are quite cautious on the stock, and we believe that shareholders should closely monitor its liquidity. While Heidelberger Druckmaschinen did not make a statutory profit last year, its positive EBIT suggests that profitability may not be far off. Click here to see if its profits are heading in the right direction over the medium term.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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