Is HanseYachts (ETR:H9Y) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that HanseYachts AG (ETR:H9Y) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for HanseYachts

What Is HanseYachts's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 HanseYachts had €29.6m of debt, an increase on €20.5m, over one year. However, it does have €21.9m in cash offsetting this, leading to net debt of about €7.74m.

How Strong Is HanseYachts' Balance Sheet?

The latest balance sheet data shows that HanseYachts had liabilities of €68.9m due within a year, and liabilities of €36.6m falling due after that. Offsetting these obligations, it had cash of €21.9m as well as receivables valued at €2.36m due within 12 months. So its liabilities total €81.3m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €90.2m, so it does suggest shareholders should keep an eye on HanseYachts' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 HanseYachts 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.

Over 12 months, HanseYachts made a loss at the EBIT level, and saw its revenue drop to €129m, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

While HanseYachts's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost €3.7m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of €17m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with HanseYachts , and understanding them should be part of your investment process.

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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