Here's Why HOCHTIEF (ETR:HOT) Can Manage Its Debt Responsibly

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. Importantly, HOCHTIEF Aktiengesellschaft (ETR:HOT) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for HOCHTIEF

What Is HOCHTIEF's Debt?

The chart below, which you can click on for greater detail, shows that HOCHTIEF had €5.08b in debt in December 2023; about the same as the year before. However, its balance sheet shows it holds €5.77b in cash, so it actually has €693.9m net cash.

How Healthy Is HOCHTIEF's Balance Sheet?

The latest balance sheet data shows that HOCHTIEF had liabilities of €12.0b due within a year, and liabilities of €5.76b falling due after that. On the other hand, it had cash of €5.77b and €6.51b worth of receivables due within a year. So it has liabilities totalling €5.46b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €7.79b, so it does suggest shareholders should keep an eye on HOCHTIEF's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, HOCHTIEF also has more cash than debt, so we're pretty confident it can manage its debt safely.

Pleasingly, HOCHTIEF is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 162% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if HOCHTIEF 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While HOCHTIEF has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, HOCHTIEF actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although HOCHTIEF's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €693.9m. And it impressed us with free cash flow of €1.1b, being 188% of its EBIT. So we are not troubled with HOCHTIEF's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for HOCHTIEF that you should be aware of.

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.

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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.