Energiedienst Holding (VTX:EDHN) Has A Pretty 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 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. As with many other companies Energiedienst Holding AG (VTX:EDHN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Energiedienst Holding

What Is Energiedienst Holding's Debt?

The image below, which you can click on for greater detail, shows that Energiedienst Holding had debt of €73.4m at the end of December 2020, a reduction from €76.9m over a year. However, its balance sheet shows it holds €173.3m in cash, so it actually has €99.9m net cash.

A Look At Energiedienst Holding's Liabilities

The latest balance sheet data shows that Energiedienst Holding had liabilities of €253.2m due within a year, and liabilities of €484.7m falling due after that. On the other hand, it had cash of €173.3m and €82.0m worth of receivables due within a year. So its liabilities total €482.6m more than the combination of its cash and short-term receivables.

Energiedienst Holding has a market capitalization of €1.06b, so it could very likely raise cash to ameliorate 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. Despite its noteworthy liabilities, Energiedienst Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Energiedienst Holding grew its EBIT by 2,778% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Energiedienst 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Energiedienst Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Energiedienst Holding's free cash flow amounted to 22% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While Energiedienst Holding does have more liabilities than liquid assets, it also has net cash of €99.9m. And we liked the look of last year's 2,778% year-on-year EBIT growth. So we are not troubled with Energiedienst Holding's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Energiedienst Holding 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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