Is ÜSTRA Hannoversche Verkehrsbetriebe (FRA:HVB) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, ÜSTRA Hannoversche Verkehrsbetriebe Aktiengesellschaft (FRA:HVB) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ÜSTRA Hannoversche Verkehrsbetriebe

What Is ÜSTRA Hannoversche Verkehrsbetriebe's Net Debt?

As you can see below, ÜSTRA Hannoversche Verkehrsbetriebe had €51.5m of debt at June 2021, down from €59.0m a year prior. However, its balance sheet shows it holds €95.2m in cash, so it actually has €43.6m net cash.

How Healthy Is ÜSTRA Hannoversche Verkehrsbetriebe's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ÜSTRA Hannoversche Verkehrsbetriebe had liabilities of €47.6m due within 12 months and liabilities of €410.7m due beyond that. Offsetting these obligations, it had cash of €95.2m as well as receivables valued at €14.4m due within 12 months. So it has liabilities totalling €348.7m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €211.2m 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'd watch its balance sheet closely, without a doubt. After all, ÜSTRA Hannoversche Verkehrsbetriebe would likely require a major re-capitalisation if it had to pay its creditors today. ÜSTRA Hannoversche Verkehrsbetriebe 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 you can't view debt in total isolation; since ÜSTRA Hannoversche Verkehrsbetriebe will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year ÜSTRA Hannoversche Verkehrsbetriebe had a loss before interest and tax, and actually shrunk its revenue by 18%, to €166m. We would much prefer see growth.

So How Risky Is ÜSTRA Hannoversche Verkehrsbetriebe?

While ÜSTRA Hannoversche Verkehrsbetriebe lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €5.7m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. When analysing debt levels, the balance sheet is the obvious place to start. 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 ÜSTRA Hannoversche Verkehrsbetriebe .

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.

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.

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