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

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.' 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. We note that H&R GmbH & Co. KGaA (ETR:2HRA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for H&R GmbH KGaA

How Much Debt Does H&R GmbH KGaA Carry?

You can click the graphic below for the historical numbers, but it shows that H&R GmbH KGaA had €155.6m of debt in September 2020, down from €164.7m, one year before. On the flip side, it has €87.3m in cash leading to net debt of about €68.2m.

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

We can see from the most recent balance sheet that H&R GmbH KGaA had liabilities of €222.8m falling due within a year, and liabilities of €204.3m due beyond that. On the other hand, it had cash of €87.3m and €87.3m worth of receivables due within a year. So it has liabilities totalling €252.5m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €215.9m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 H&R GmbH KGaA's ability to maintain a healthy balance sheet going forward. 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). Indeed, it lost €7.2m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with H&R GmbH KGaA , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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