HELMA Eigenheimbau (ETR:H5E) Has A Somewhat Strained Balance Sheet

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. As with many other companies HELMA Eigenheimbau Aktiengesellschaft (ETR:H5E) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for HELMA Eigenheimbau

How Much Debt Does HELMA Eigenheimbau Carry?

The image below, which you can click on for greater detail, shows that at December 2020 HELMA Eigenheimbau had debt of €218.5m, up from €191.6m in one year. However, it also had €20.1m in cash, and so its net debt is €198.4m.

A Look At HELMA Eigenheimbau's Liabilities

We can see from the most recent balance sheet that HELMA Eigenheimbau had liabilities of €111.6m falling due within a year, and liabilities of €195.2m due beyond that. On the other hand, it had cash of €20.1m and €94.1m worth of receivables due within a year. So its liabilities total €192.6m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €229.6m, so it does suggest shareholders should keep an eye on HELMA Eigenheimbau's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While HELMA Eigenheimbau's debt to EBITDA ratio of 8.1 suggests a heavy debt load, its interest coverage of 7.7 implies it services that debt with ease. Overall we'd say it seems likely the company is carrying a fairly heavy swag of debt. Unfortunately, HELMA Eigenheimbau saw its EBIT slide 2.8% in the last twelve months. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. 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 HELMA Eigenheimbau'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, HELMA Eigenheimbau saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, HELMA Eigenheimbau's net debt to EBITDA left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its interest cover is a good sign, and makes us more optimistic. We're quite clear that we consider HELMA Eigenheimbau to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. When analysing debt levels, the balance sheet is the obvious place to start. 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 HELMA Eigenheimbau (including 1 which makes us a bit uncomfortable) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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