We Think Paul Hartmann (FRA:PHH2) Can Manage Its Debt With Ease

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 can see that Paul Hartmann AG (FRA:PHH2) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Paul Hartmann

What Is Paul Hartmann's Debt?

As you can see below, at the end of December 2020, Paul Hartmann had €17.5m of debt, up from €12.9m a year ago. Click the image for more detail. But it also has €254.3m in cash to offset that, meaning it has €236.8m net cash.

How Healthy Is Paul Hartmann's Balance Sheet?

According to the last reported balance sheet, Paul Hartmann had liabilities of €460.1m due within 12 months, and liabilities of €297.1m due beyond 12 months. Offsetting these obligations, it had cash of €254.3m as well as receivables valued at €366.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €136.2m.

Given Paul Hartmann has a market capitalization of €1.36b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Paul Hartmann also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Paul Hartmann grew its EBIT by 111% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Paul Hartmann's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Paul Hartmann 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. During the last three years, Paul Hartmann produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While Paul Hartmann does have more liabilities than liquid assets, it also has net cash of €236.8m. And it impressed us with its EBIT growth of 111% over the last year. So is Paul Hartmann'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 1 warning sign for Paul Hartmann that 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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