H&R GmbH KGaA (ETR:2HRA) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies H&R GmbH & Co. KGaA (ETR:2HRA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for H&R GmbH KGaA

What Is H&R GmbH KGaA's Net Debt?

As you can see below, H&R GmbH KGaA had €155.6m of debt at September 2020, down from €164.7m a year prior. However, because it has a cash reserve of €87.3m, its net debt is less, at about €68.2m.

How Healthy Is H&R GmbH KGaA's Balance Sheet?

The latest balance sheet data shows that H&R GmbH KGaA had liabilities of €222.8m due within a year, and liabilities of €204.3m falling due after that. On the other hand, it had cash of €87.3m and €87.3m worth of receivables due within a year. So its liabilities total €252.5m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's €195.0m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 H&R GmbH KGaA 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, H&R GmbH KGaA made a loss at the EBIT level, and saw its revenue drop to €906m, which is a fall of 18%. We would much prefer see growth.

Caveat Emptor

Not only did H&R GmbH KGaA's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €7.2m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of €20m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for H&R GmbH KGaA you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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