The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. Importantly, Hamon & Cie (International) SA (EBR:HAMO) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
What Is Hamon & Cie (International)’s Net Debt?
As you can see below, Hamon & Cie (International) had €125.9m of debt, at June 2019, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of €32.3m, its net debt is less, at about €93.6m.
How Strong Is Hamon & Cie (International)’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hamon & Cie (International) had liabilities of €305.2m due within 12 months and liabilities of €24.1m due beyond that. Offsetting these obligations, it had cash of €32.3m as well as receivables valued at €179.4m due within 12 months. So it has liabilities totalling €117.6m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the €10.4m company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt. At the end of the day, Hamon & Cie (International) would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since Hamon & Cie (International) will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Hamon & Cie (International) made a loss at the EBIT level, and saw its revenue drop to €311m, which is a fall of 13%. That’s not what we would hope to see.
Not only did Hamon & Cie (International)’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €4.9m at the EBIT level. Reflecting on this and the significant total liabilities, it’s hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost €21m in the last year. So we’re about as excited about owning this stock as hiking up a snowy mountain with wet socks on in the rain. It’s too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we’ve identified 4 warning signs for Hamon & Cie (International) (1 is potentially serious) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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