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

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. As with many other companies HOCHDORF Holding AG (VTX:HOCN) makes use of debt. But the real question is whether this debt is making the company risky.

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for HOCHDORF Holding

How Much Debt Does HOCHDORF Holding Carry?

As you can see below, at the end of December 2022, HOCHDORF Holding had CHF67.0m of debt, up from CHF57.0m a year ago. Click the image for more detail. On the flip side, it has CHF10.4m in cash leading to net debt of about CHF56.6m.

How Healthy Is HOCHDORF Holding's Balance Sheet?

According to the last reported balance sheet, HOCHDORF Holding had liabilities of CHF108.3m due within 12 months, and liabilities of CHF7.29m due beyond 12 months. Offsetting this, it had CHF10.4m in cash and CHF61.9m in receivables that were due within 12 months. So its liabilities total CHF43.3m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CHF44.7m, 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 CHF292m, which is a fall of 3.7%. That's not what we would hope to see.

Caveat Emptor

Importantly, HOCHDORF Holding had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CHF12m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CHF22m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for HOCHDORF Holding you should be aware of, and 1 of them is a bit concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.