Heidelberger Druckmaschinen (ETR:HDD) Has A Somewhat Strained 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 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 Heidelberger Druckmaschinen Aktiengesellschaft (ETR:HDD) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Heidelberger Druckmaschinen

How Much Debt Does Heidelberger Druckmaschinen Carry?

You can click the graphic below for the historical numbers, but it shows that Heidelberger Druckmaschinen had €155.4m of debt in September 2021, down from €210.0m, one year before. But on the other hand it also has €205.4m in cash, leading to a €50.0m net cash position.

A Look At Heidelberger Druckmaschinen's Liabilities

The latest balance sheet data shows that Heidelberger Druckmaschinen had liabilities of €873.9m due within a year, and liabilities of €1.18b falling due after that. Offsetting this, it had €205.4m in cash and €362.2m in receivables that were due within 12 months. So it has liabilities totalling €1.49b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €919.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Heidelberger Druckmaschinen would likely require a major re-capitalisation if it had to pay its creditors today. Heidelberger Druckmaschinen boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Notably, Heidelberger Druckmaschinen made a loss at the EBIT level, last year, but improved that to positive EBIT of €15m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Heidelberger Druckmaschinen 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Heidelberger Druckmaschinen 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 year, Heidelberger Druckmaschinen actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Heidelberger Druckmaschinen does have more liabilities than liquid assets, it also has net cash of €50.0m. And it impressed us with free cash flow of €48m, being 312% of its EBIT. So although we see some areas for improvement, we're not too worried about Heidelberger Druckmaschinen's balance sheet. 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. Case in point: We've spotted 1 warning sign for Heidelberger Druckmaschinen you should be aware of.

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.