Here's Why Heidelberger Druckmaschinen (ETR:HDD) Is Weighed Down By Its Debt Load

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Heidelberger Druckmaschinen Aktiengesellschaft (ETR:HDD) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Heidelberger Druckmaschinen

What Is Heidelberger Druckmaschinen's Debt?

You can click the graphic below for the historical numbers, but it shows that Heidelberger Druckmaschinen had €91.9m of debt in March 2022, down from €219.8m, one year before. But on the other hand it also has €165.7m in cash, leading to a €73.8m net cash position.

A Look At Heidelberger Druckmaschinen's Liabilities

According to the last reported balance sheet, Heidelberger Druckmaschinen had liabilities of €879.9m due within 12 months, and liabilities of €1.06b due beyond 12 months. Offsetting this, it had €165.7m in cash and €348.3m in receivables that were due within 12 months. So its liabilities total €1.43b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €504.6m 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 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 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'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. During the last year, Heidelberger Druckmaschinen burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Heidelberger Druckmaschinen does have more liabilities than liquid assets, it also has net cash of €73.8m. Unfortunately, though, both its struggle level of total liabilities and its conversion of EBIT to free cash flow leave us concerned about Heidelberger Druckmaschinen So despite the cash, we do think it carries some risks. When analysing debt levels, the balance sheet is the obvious place to start. 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 .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.