Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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. As with many other companies Bremer Lagerhaus Gesellschaft Aktiengesellschaft von 1877 (FRA:BLH) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Bremer Lagerhaus Gesellschaft von 1877’s Debt?
The chart below, which you can click on for greater detail, shows that Bremer Lagerhaus Gesellschaft von 1877 had €194.1m in debt in December 2018; about the same as the year before. However, it also had €20.6m in cash, and so its net debt is €173.5m.
How Strong Is Bremer Lagerhaus Gesellschaft von 1877’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Bremer Lagerhaus Gesellschaft von 1877 had liabilities of €305.7m due within 12 months and liabilities of €171.5m due beyond that. Offsetting these obligations, it had cash of €20.6m as well as receivables valued at €254.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €202.1m.
The deficiency here weighs heavily on the €49.9m 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 definitely think shareholders need to watch this one closely. After all, Bremer Lagerhaus Gesellschaft von 1877 would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can’t view debt in total isolation; since Bremer Lagerhaus Gesellschaft von 1877 will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Bremer Lagerhaus Gesellschaft von 1877 reported revenue of €1.1b, which is a gain of 4.9%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Bremer Lagerhaus Gesellschaft von 1877 had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable €20m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through €9.8m in the last year. So we consider this a high risk stock and we wouldn’t be at all surprised if the company asks shareholders for money before long. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Bremer Lagerhaus Gesellschaft von 1877’s profit, revenue, and operating cashflow have changed over the last few years.
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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