MT Højgaard Holding (CPH:MTHH) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies MT Højgaard Holding A/S (CPH:MTHH) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for MT Højgaard Holding

How Much Debt Does MT Højgaard Holding Carry?

As you can see below, MT Højgaard Holding had kr.434.3m of debt at September 2023, down from kr.464.4m a year prior. But on the other hand it also has kr.691.6m in cash, leading to a kr.257.3m net cash position.

How Healthy Is MT Højgaard Holding's Balance Sheet?

According to the last reported balance sheet, MT Højgaard Holding had liabilities of kr.3.63b due within 12 months, and liabilities of kr.835.7m due beyond 12 months. Offsetting this, it had kr.691.6m in cash and kr.2.64b in receivables that were due within 12 months. So its liabilities total kr.1.13b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's kr.967.2m 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. Given that MT Højgaard Holding 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.

If MT Højgaard Holding can keep growing EBIT at last year's rate of 14% over the last year, then it will find its debt load easier to manage. 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 MT Højgaard Holding'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, a company can only pay off debt with cold hard cash, not accounting profits. MT Højgaard Holding 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, MT Højgaard Holding recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although MT Højgaard Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr.257.3m. And it impressed us with free cash flow of kr.555m, being 69% of its EBIT. So we don't have any problem with MT Højgaard Holding's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for MT Højgaard Holding that 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.