Does Energiedienst Holding (VTX:EDHN) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Energiedienst Holding AG (VTX:EDHN) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Energiedienst Holding

What Is Energiedienst Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Energiedienst Holding had €104.6m of debt, an increase on €92.8m, over one year. However, its balance sheet shows it holds €122.2m in cash, so it actually has €17.6m net cash.

How Strong Is Energiedienst Holding's Balance Sheet?

The latest balance sheet data shows that Energiedienst Holding had liabilities of €382.1m due within a year, and liabilities of €384.5m falling due after that. Offsetting these obligations, it had cash of €122.2m as well as receivables valued at €158.3m due within 12 months. So its liabilities total €486.1m more than the combination of its cash and short-term receivables.

Energiedienst Holding has a market capitalization of €1.37b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Energiedienst Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Energiedienst Holding has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Energiedienst Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Energiedienst Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Energiedienst Holding actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

Although Energiedienst Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €17.6m. And we liked the look of last year's 28% year-on-year EBIT growth. So we are not troubled with Energiedienst Holding's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Energiedienst Holding (of which 1 can't be ignored!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.