Here's Why Heidelberger Druckmaschinen (ETR:HDD) Has A Meaningful Debt Burden

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Heidelberger Druckmaschinen Aktiengesellschaft (ETR:HDD) makes use of debt. 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. 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. 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. 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?

The image below, which you can click on for greater detail, shows that Heidelberger Druckmaschinen had debt of €196.0m at the end of December 2021, a reduction from €300.0m over a year. However, because it has a cash reserve of €190.0m, its net debt is less, at about €6.00m.

How Healthy Is Heidelberger Druckmaschinen's Balance Sheet?

The latest balance sheet data shows that Heidelberger Druckmaschinen had liabilities of €889.0m due within a year, and liabilities of €1.18b falling due after that. Offsetting these obligations, it had cash of €190.0m as well as receivables valued at €411.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.47b.

This deficit casts a shadow over the €641.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Heidelberger Druckmaschinen would likely require a major re-capitalisation if it had to pay its creditors today. Heidelberger Druckmaschinen may have virtually no net debt, but it does have a lot of liabilities.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Heidelberger Druckmaschinen's net debt to EBITDA ratio is very low, at 0.045, suggesting the debt is only trivial. But EBIT was only 5.4 times the interest expense last year, so the borrowing is clearly weighing on the business somewhat. We also note that Heidelberger Druckmaschinen improved its EBIT from a last year's loss to a positive €58m. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Heidelberger Druckmaschinen's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Heidelberger Druckmaschinen produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Mulling over Heidelberger Druckmaschinen's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. But at least it's pretty decent at managing its debt, based on its EBITDA,; that's encouraging. Once we consider all the factors above, together, it seems to us that Heidelberger Druckmaschinen's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Heidelberger Druckmaschinen .

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.