Is Heidelberger Druckmaschinen (ETR:HDD) A Risky Investment?

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.' 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. Importantly, Heidelberger Druckmaschinen Aktiengesellschaft (ETR:HDD) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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 €210.0m of debt in September 2020, down from €526.4m, one year before. However, it also had €102.1m in cash, and so its net debt is €107.9m.

How Healthy Is Heidelberger Druckmaschinen's Balance Sheet?

According to the last reported balance sheet, Heidelberger Druckmaschinen had liabilities of €752.3m due within 12 months, and liabilities of €1.32b due beyond 12 months. Offsetting this, it had €102.1m in cash and €332.8m in receivables that were due within 12 months. So it has liabilities totalling €1.63b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €388.6m 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Heidelberger Druckmaschinen can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Heidelberger Druckmaschinen had a loss before interest and tax, and actually shrunk its revenue by 19%, to €2.1b. That's not what we would hope to see.

Caveat Emptor

Not only did Heidelberger Druckmaschinen's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €359k at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized €166m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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.

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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