These 4 Measures Indicate That thyssenkrupp (ETR:TKA) Is Using Debt Extensively

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that thyssenkrupp AG (ETR:TKA) does use debt in its business. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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.

What Is thyssenkrupp's Debt?

The image below, which you can click on for greater detail, shows that thyssenkrupp had debt of €1.43b at the end of December 2024, a reduction from €2.93b over a year. However, its balance sheet shows it holds €5.71b in cash, so it actually has €4.27b net cash.

A Look At thyssenkrupp's Liabilities

The latest balance sheet data shows that thyssenkrupp had liabilities of €12.3b due within a year, and liabilities of €7.15b falling due after that. Offsetting this, it had €5.71b in cash and €4.80b in receivables that were due within 12 months. So its liabilities total €8.96b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €5.50b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, thyssenkrupp would probably need a major re-capitalization if its creditors were to demand repayment. thyssenkrupp boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

View our latest analysis for thyssenkrupp

Although thyssenkrupp made a loss at the EBIT level, last year, it was also good to see that it generated €132m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine thyssenkrupp's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. thyssenkrupp may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, thyssenkrupp actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While thyssenkrupp does have more liabilities than liquid assets, it also has net cash of €4.27b. The cherry on top was that in converted 246% of that EBIT to free cash flow, bringing in €323m. So although we see some areas for improvement, we're not too worried about thyssenkrupp's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that thyssenkrupp is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.