Is HOCHDORF Holding (VTX:HOCN) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that HOCHDORF Holding AG (VTX:HOCN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that HOCN is potentially undervalued!

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 CHF67.2m at the end of June 2022, a reduction from CHF110.4m over a year. However, because it has a cash reserve of CHF20.4m, its net debt is less, at about CHF46.8m.

How Healthy Is HOCHDORF Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HOCHDORF Holding had liabilities of CHF44.3m due within 12 months and liabilities of CHF85.8m due beyond that. Offsetting this, it had CHF20.4m in cash and CHF49.8m in receivables that were due within 12 months. So it has liabilities totalling CHF59.9m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CHF56.0m, we think shareholders really should watch HOCHDORF Holding's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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 reported revenue of CHF309m, which is a gain of 7.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, HOCHDORF Holding had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CHF38m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CHF25m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for HOCHDORF Holding (1 can't be ignored!) that you should be aware of before investing here.

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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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.