Is KraussMaffei (SHSE:600579) A Risky Investment?

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.' 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. As with many other companies KraussMaffei Company Limited (SHSE:600579) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for KraussMaffei

What Is KraussMaffei's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 KraussMaffei had CN¥5.73b of debt, an increase on CN¥5.03b, over one year. However, it also had CN¥1.45b in cash, and so its net debt is CN¥4.28b.

How Healthy Is KraussMaffei's Balance Sheet?

We can see from the most recent balance sheet that KraussMaffei had liabilities of CN¥6.45b falling due within a year, and liabilities of CN¥8.59b due beyond that. Offsetting these obligations, it had cash of CN¥1.45b as well as receivables valued at CN¥3.50b due within 12 months. So it has liabilities totalling CN¥10.1b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥5.04b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, KraussMaffei would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is KraussMaffei's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year KraussMaffei had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥10b. We would much prefer see growth.

Caveat Emptor

Not only did KraussMaffei's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥421m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥325m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that KraussMaffei is showing 2 warning signs in our investment analysis , 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.