Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hamon & Cie (International) SA (EBR:HAMO) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company’s use of debt, we first look at 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 the year before. You can click the chart for greater detail. However, it also had €32.3m in cash, and so its net debt is €93.6m.
A Look At Hamon & Cie (International)’s Liabilities
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 €21.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Hamon & Cie (International) would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hamon & Cie (International)’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
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%. We would much prefer see growth.
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). Its EBIT loss was a whopping €4.9m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of €21m in the last year. So we think this stock is quite risky, like eating chicken you think might look too pink. We’d prefer pass. For riskier companies like Hamon & Cie (International) I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.