Health Check: How Prudently Does HOCHTIEF (ETR:HOT) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that HOCHTIEF Aktiengesellschaft (ETR:HOT) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 HOCHTIEF

What Is HOCHTIEF's Debt?

You can click the graphic below for the historical numbers, but it shows that HOCHTIEF had €5.11b of debt in June 2021, down from €6.82b, one year before. However, its balance sheet shows it holds €5.32b in cash, so it actually has €215.9m net cash.

A Look At HOCHTIEF's Liabilities

The latest balance sheet data shows that HOCHTIEF had liabilities of €9.34b due within a year, and liabilities of €6.07b falling due after that. Offsetting this, it had €5.32b in cash and €5.65b in receivables that were due within 12 months. So its liabilities total €4.44b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €4.73b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, HOCHTIEF boasts net cash, so it's fair to say it does not have a heavy debt load! 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 HOCHTIEF'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.

In the last year HOCHTIEF had a loss before interest and tax, and actually shrunk its revenue by 17%, to €21b. We would much prefer see growth.

So How Risky Is HOCHTIEF?

While HOCHTIEF lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of €387m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For instance, we've identified 4 warning signs for HOCHTIEF (1 is a bit concerning) you should be aware of.

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.

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.

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