Is Heidelberger Druckmaschinen (ETR:HDD) Using Debt Sensibly?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Heidelberger Druckmaschinen Aktiengesellschaft (ETR:HDD) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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.

Check out our latest analysis for Heidelberger Druckmaschinen

What Is Heidelberger Druckmaschinen's Net Debt?

As you can see below, Heidelberger Druckmaschinen had €251.0m of debt at December 2020, down from €597.0m a year prior. On the flip side, it has €173.0m in cash leading to net debt of about €78.0m.

A Look At Heidelberger Druckmaschinen's Liabilities

Zooming in on the latest balance sheet data, we can see that Heidelberger Druckmaschinen had liabilities of €797.0m due within 12 months and liabilities of €1.39b due beyond that. Offsetting these obligations, it had cash of €173.0m as well as receivables valued at €321.0m due within 12 months. So its liabilities total €1.70b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €568.5m 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. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Heidelberger Druckmaschinen had a loss before interest and tax, and actually shrunk its revenue by 21%, to €2.0b. That makes us nervous, to say the least.

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 €16m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized €142m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Heidelberger Druckmaschinen is showing 1 warning sign in our investment analysis , you should know about...

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.

If you’re looking to trade Heidelberger Druckmaschinen, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.