These 4 Measures Indicate That Energiedienst Holding (VTX:EDHN) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Energiedienst Holding AG (VTX:EDHN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Energiedienst Holding

What Is Energiedienst Holding's Net Debt?

As you can see below, at the end of December 2022, Energiedienst Holding had €92.8m of debt, up from €76.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds €169.3m in cash, so it actually has €76.5m net cash.

How Healthy Is Energiedienst Holding's Balance Sheet?

We can see from the most recent balance sheet that Energiedienst Holding had liabilities of €321.3m falling due within a year, and liabilities of €378.4m due beyond that. On the other hand, it had cash of €169.3m and €95.6m worth of receivables due within a year. So it has liabilities totalling €434.8m more than its cash and near-term receivables, combined.

Energiedienst Holding has a market capitalization of €1.43b, 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. 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.

The good news is that Energiedienst Holding has increased its EBIT by 4.1% over twelve months, which should ease any concerns about debt repayment. 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. In the last three years, Energiedienst Holding created free cash flow amounting to 19% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and 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 €76.5m. On top of that, it increased its EBIT by 4.1% in the last twelve months. So we don't have any problem with Energiedienst Holding's use of debt. 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. 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.

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.