thyssenkrupp (ETR:TKA) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, thyssenkrupp AG (ETR:TKA) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 thyssenkrupp

How Much Debt Does thyssenkrupp Carry?

As you can see below, thyssenkrupp had €4.91b of debt at December 2020, down from €8.20b a year prior. But on the other hand it also has €10.6b in cash, leading to a €5.70b net cash position.

How Healthy Is thyssenkrupp's Balance Sheet?

The latest balance sheet data shows that thyssenkrupp had liabilities of €10.6b due within a year, and liabilities of €14.9b falling due after that. Offsetting these obligations, it had cash of €10.6b as well as receivables valued at €5.95b due within 12 months. So its liabilities total €8.87b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's €6.99b 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. 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. 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 thyssenkrupp 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.

In the last year thyssenkrupp had a loss before interest and tax, and actually shrunk its revenue by 16%, to €29b. That's not what we would hope to see.

So How Risky Is thyssenkrupp?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months thyssenkrupp lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €2.2b and booked a €5.2b accounting loss. However, it has net cash of €5.70b, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with thyssenkrupp .

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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