Hawesko Holding (ETR:HAW) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Hawesko Holding AG (ETR:HAW) does use debt in its business. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hawesko Holding

What Is Hawesko Holding's Debt?

As you can see below, Hawesko Holding had €23.0m of debt at March 2021, down from €47.0m a year prior. However, its balance sheet shows it holds €56.4m in cash, so it actually has €33.4m net cash.

A Look At Hawesko Holding's Liabilities

We can see from the most recent balance sheet that Hawesko Holding had liabilities of €158.8m falling due within a year, and liabilities of €137.5m due beyond that. Offsetting this, it had €56.4m in cash and €47.1m in receivables that were due within 12 months. So its liabilities total €192.8m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Hawesko Holding is worth €474.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Hawesko Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Hawesko Holding grew its EBIT by 115% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hawesko Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hawesko Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Hawesko Holding actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Hawesko Holding does have more liabilities than liquid assets, it also has net cash of €33.4m. And it impressed us with free cash flow of €98m, being 139% of its EBIT. So is Hawesko Holding's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for Hawesko Holding (1 is significant) you should be aware of.

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.

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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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