Is HORNBACH Holding KGaA (ETR:HBH) Using Too Much Debt?

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.' 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 can see that HORNBACH Holding AG & Co. KGaA (ETR:HBH) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for HORNBACH Holding KGaA

What Is HORNBACH Holding KGaA's Net Debt?

As you can see below, HORNBACH Holding KGaA had €734.6m of debt at November 2020, down from €1.01b a year prior. However, its balance sheet shows it holds €743.3m in cash, so it actually has €8.70m net cash.

How Strong Is HORNBACH Holding KGaA's Balance Sheet?

The latest balance sheet data shows that HORNBACH Holding KGaA had liabilities of €876.5m due within a year, and liabilities of €1.38b falling due after that. On the other hand, it had cash of €743.3m and €65.5m worth of receivables due within a year. So its liabilities total €1.45b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's €1.26b 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. HORNBACH Holding KGaA 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.

Better yet, HORNBACH Holding KGaA grew its EBIT by 109% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine HORNBACH Holding KGaA'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. HORNBACH Holding KGaA 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 most recent three years, HORNBACH Holding KGaA recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

Although HORNBACH Holding KGaA's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €8.70m. And we liked the look of last year's 109% year-on-year EBIT growth. So we are not troubled with HORNBACH Holding KGaA's debt use. 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. Case in point: We've spotted 3 warning signs for HORNBACH Holding KGaA you should be aware of, and 1 of them is a bit unpleasant.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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