These 4 Measures Indicate That Hamburger Hafen und Logistik (ETR:HHFA) Is Using Debt Reasonably Well

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.' 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 Hamburger Hafen und Logistik Aktiengesellschaft (ETR:HHFA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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.

View our latest analysis for Hamburger Hafen und Logistik

What Is Hamburger Hafen und Logistik's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Hamburger Hafen und Logistik had €628.1m of debt, an increase on €582.7m, over one year. On the flip side, it has €185.6m in cash leading to net debt of about €442.5m.

How Strong Is Hamburger Hafen und Logistik's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hamburger Hafen und Logistik had liabilities of €345.5m due within 12 months and liabilities of €1.75b due beyond that. On the other hand, it had cash of €185.6m and €262.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.65b.

This deficit casts a shadow over the €1.09b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Hamburger Hafen und Logistik would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Hamburger Hafen und Logistik has net debt of just 1.2 times EBITDA, indicating that it is certainly not a reckless borrower. And it boasts interest cover of 9.0 times, which is more than adequate. On top of that, Hamburger Hafen und Logistik grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. 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 Hamburger Hafen und Logistik can strengthen its balance sheet over time. 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. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Hamburger Hafen und Logistik recorded free cash flow worth 69% 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.

Our View

When it comes to the balance sheet, the standout positive for Hamburger Hafen und Logistik was the fact that it seems able to grow its EBIT confidently. But the other factors we noted above weren't so encouraging. In particular, level of total liabilities gives us cold feet. We would also note that Infrastructure industry companies like Hamburger Hafen und Logistik commonly do use debt without problems. When we consider all the elements mentioned above, it seems to us that Hamburger Hafen und Logistik is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Hamburger Hafen und Logistik (1 can't be ignored) you should be aware of.

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. 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.