David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that Burgenland Holding Aktiengesellschaft (VIE:BHD) does use debt in its business. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Burgenland Holding’s Net Debt?
As you can see below, Burgenland Holding had €972.0k of debt at March 2019, down from €1.18m a year prior. And it doesn’t have much cash, so its net debt is about the same.
How Healthy Is Burgenland Holding’s Balance Sheet?
The latest balance sheet data shows that Burgenland Holding had liabilities of €1.40m due within a year, and liabilities of €7.0k falling due after that. Offsetting this, it had €10.0k in cash and €10.0m in receivables that were due within 12 months. So it actually has €8.65m more liquid assets than total liabilities.
This short term liquidity is a sign that Burgenland Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, Burgenland Holding has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Burgenland Holding’s earnings that will influence how the balance sheet holds up in the future. 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.
Given it has no significant operating revenue at the moment, shareholders will be hoping Burgenland Holding can make progress and gain better traction for the business, before it runs low on cash.
Not only did Burgenland Holding’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €239k. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And on top of that, it booked free cash flow of €1.2m and profit of €9.8m over the last year. So it seems too risky for our taste. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Burgenland Holding’s profit, revenue, and operating cashflow have changed over the last few years.
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.
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