Is Energiedienst Holding (VTX:EDHN) Using Too Much 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.' 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 note that Energiedienst Holding AG (VTX:EDHN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Energiedienst Holding

What Is Energiedienst Holding's Debt?

As you can see below, at the end of December 2021, Energiedienst Holding had €76.6m of debt, up from €73.4m a year ago. Click the image for more detail. But it also has €303.3m in cash to offset that, meaning it has €226.7m net cash.

A Look At Energiedienst Holding's Liabilities

The latest balance sheet data shows that Energiedienst Holding had liabilities of €395.6m due within a year, and liabilities of €485.0m falling due after that. On the other hand, it had cash of €303.3m and €80.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €497.0m.

While this might seem like a lot, it is not so bad since Energiedienst Holding has a market capitalization of €1.46b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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.

Even more impressive was the fact that Energiedienst Holding grew its EBIT by 142% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Energiedienst Holding can strengthen its balance sheet over time. 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. 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. Over the last three years, Energiedienst Holding recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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 €226.7m. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in €130m. So we don't think Energiedienst Holding's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Energiedienst Holding .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.