thyssenkrupp (ETR:TKA) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 thyssenkrupp AG (ETR:TKA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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. 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 thyssenkrupp

How Much Debt Does thyssenkrupp Carry?

The chart below, which you can click on for greater detail, shows that thyssenkrupp had €3.91b in debt in December 2022; about the same as the year before. However, its balance sheet shows it holds €7.16b in cash, so it actually has €3.25b net cash.

How Healthy Is thyssenkrupp's Balance Sheet?

According to the last reported balance sheet, thyssenkrupp had liabilities of €12.4b due within 12 months, and liabilities of €9.25b due beyond 12 months. Offsetting this, it had €7.16b in cash and €6.55b in receivables that were due within 12 months. So it has liabilities totalling €7.92b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €4.00b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, thyssenkrupp would probably need a major re-capitalization if its creditors were to demand repayment. Given that thyssenkrupp has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Better yet, thyssenkrupp grew its EBIT by 122% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 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. Over the last two years, thyssenkrupp saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

Although thyssenkrupp's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €3.25b. And we liked the look of last year's 122% year-on-year EBIT growth. Despite the cash, we do find thyssenkrupp's level of total liabilities concerning, so we're not particularly comfortable with the stock. 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. For instance, we've identified 2 warning signs for thyssenkrupp that you should be aware of.

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.