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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, KHD Humboldt Wedag International AG (ETR:KWG) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for KHD Humboldt Wedag International

How Much Debt Does KHD Humboldt Wedag International Carry?

As you can see below, KHD Humboldt Wedag International had €25.0m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has €67.7m in cash, leading to a €42.7m net cash position.

A Look At KHD Humboldt Wedag International's Liabilities

We can see from the most recent balance sheet that KHD Humboldt Wedag International had liabilities of €156.7m falling due within a year, and liabilities of €32.3m due beyond that. Offsetting these obligations, it had cash of €67.7m as well as receivables valued at €57.8m due within 12 months. So its liabilities total €63.5m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €91.0m, so it does suggest shareholders should keep an eye on KHD Humboldt Wedag International's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 you can't view debt in total isolation; since KHD Humboldt Wedag International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year KHD Humboldt Wedag International wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to €230m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is KHD Humboldt Wedag International?

Although KHD Humboldt Wedag International had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of €346k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. One positive is that KHD Humboldt Wedag International is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with KHD Humboldt Wedag International (including 1 which is a bit concerning) .

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.

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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.