We Think HOCHDORF Holding (VTX:HOCN) Has A Fair Chunk Of 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.' 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. We note that HOCHDORF Holding AG (VTX:HOCN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for HOCHDORF Holding

How Much Debt Does HOCHDORF Holding Carry?

As you can see below, HOCHDORF Holding had CHF118.0m of debt at June 2020, down from CHF184.4m a year prior. On the flip side, it has CHF9.98m in cash leading to net debt of about CHF108.0m.

A Look At HOCHDORF Holding's Liabilities

The latest balance sheet data shows that HOCHDORF Holding had liabilities of CHF45.0m due within a year, and liabilities of CHF135.9m falling due after that. Offsetting these obligations, it had cash of CHF9.98m as well as receivables valued at CHF99.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF71.4m.

This deficit isn't so bad because HOCHDORF Holding is worth CHF134.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HOCHDORF Holding can strengthen its balance sheet over time. 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 CHF372m, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

While HOCHDORF Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CHF73m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CHF7.2m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with HOCHDORF Holding .

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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