Here's Why HOCHDORF Holding (VTX:HOCN) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that HOCHDORF Holding AG (VTX:HOCN) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for HOCHDORF Holding

What Is HOCHDORF Holding's Net Debt?

The image below, which you can click on for greater detail, shows that HOCHDORF Holding had debt of CHF110.4m at the end of June 2021, a reduction from CHF119.5m over a year. However, it also had CHF8.93m in cash, and so its net debt is CHF101.5m.

How Healthy Is HOCHDORF Holding's Balance Sheet?

According to the last reported balance sheet, HOCHDORF Holding had liabilities of CHF57.7m due within 12 months, and liabilities of CHF109.9m due beyond 12 months. Offsetting these obligations, it had cash of CHF8.93m as well as receivables valued at CHF92.7m due within 12 months. So its liabilities total CHF66.0m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CHF99.7m, so it does suggest shareholders should keep an eye on HOCHDORF Holding's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine HOCHDORF Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, HOCHDORF Holding made a loss at the EBIT level, and saw its revenue drop to CHF288m, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

Not only did HOCHDORF 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 CHF8.4m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CHF8.1m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that HOCHDORF Holding is showing 1 warning sign in our investment analysis , you should know about...

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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