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 can see that DEUTZ Aktiengesellschaft (ETR:DEZ) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is DEUTZ's Net Debt?
As you can see below, at the end of March 2021, DEUTZ had €88.5m of debt, up from €54.7m a year ago. Click the image for more detail. However, it also had €57.8m in cash, and so its net debt is €30.7m.
How Strong Is DEUTZ's Balance Sheet?
According to the last reported balance sheet, DEUTZ had liabilities of €434.0m due within 12 months, and liabilities of €242.7m due beyond 12 months. Offsetting this, it had €57.8m in cash and €159.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €459.8m.
This is a mountain of leverage relative to its market capitalization of €744.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine DEUTZ'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.
In the last year DEUTZ had a loss before interest and tax, and actually shrunk its revenue by 25%, to €1.3b. To be frank that doesn't bode well.
While DEUTZ's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost €44m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of €99m. So we do think this stock is quite risky. For riskier companies like DEUTZ I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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