HOCHTIEF (ETR:HOT) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that HOCHTIEF Aktiengesellschaft (ETR:HOT) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for HOCHTIEF

What Is HOCHTIEF's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 HOCHTIEF had €4.98b of debt, an increase on €3.67b, over one year. But on the other hand it also has €5.42b in cash, leading to a €439.9m net cash position.

A Look At HOCHTIEF's Liabilities

We can see from the most recent balance sheet that HOCHTIEF had liabilities of €9.89b falling due within a year, and liabilities of €5.31b due beyond that. On the other hand, it had cash of €5.42b and €5.20b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.57b.

This deficit is considerable relative to its market capitalization of €5.24b, 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, HOCHTIEF made a loss at the EBIT level, and saw its revenue drop to €23b, which is a fall of 11%. 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 €427m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 example HOCHTIEF has 3 warning signs (and 1 which shouldn't be ignored) we think 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 decide to trade HOCHTIEF, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all 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.