Is KHD Humboldt Wedag International (ETR:KWG) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that KHD Humboldt Wedag International AG (ETR:KWG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 KHD Humboldt Wedag International

What Is KHD Humboldt Wedag International's Net Debt?

The chart below, which you can click on for greater detail, shows that KHD Humboldt Wedag International had €25.0m in debt in December 2020; about the same as the year before. But it also has €69.0m in cash to offset that, meaning it has €44.0m net cash.

A Look At KHD Humboldt Wedag International's Liabilities

According to the last reported balance sheet, KHD Humboldt Wedag International had liabilities of €143.5m due within 12 months, and liabilities of €26.3m due beyond 12 months. Offsetting these obligations, it had cash of €69.0m as well as receivables valued at €48.0m due within 12 months. So its liabilities total €52.8m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because KHD Humboldt Wedag International is worth €90.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, KHD Humboldt Wedag International boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is KHD Humboldt Wedag International's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, KHD Humboldt Wedag International reported revenue of €151m, which is a gain of 3.4%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is KHD Humboldt Wedag International?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that KHD Humboldt Wedag International had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €13m and booked a €8.0m accounting loss. With only €44.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how KHD Humboldt Wedag International's profit, revenue, and operating cashflow have changed over the last few years.

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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