These 4 Measures Indicate That MT Højgaard Holding (CPH:MTHH) Is Using Debt Extensively

Warren Buffett famously said, '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. 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?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MT Højgaard Holding

What Is MT Højgaard Holding's Debt?

As you can see below, MT Højgaard Holding had kr.491.1m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had kr.140.3m in cash, and so its net debt is kr.350.8m.

How Healthy Is MT Højgaard Holding's Balance Sheet?

The latest balance sheet data shows that MT Højgaard Holding had liabilities of kr.2.27b due within a year, and liabilities of kr.1.18b falling due after that. On the other hand, it had cash of kr.140.3m and kr.1.69b worth of receivables due within a year. So it has liabilities totalling kr.1.62b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of kr.1.80b, so it does suggest shareholders should keep an eye on MT Højgaard Holding's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While MT Højgaard Holding's low debt to EBITDA ratio of 1.4 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 2.9 times last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Pleasingly, MT Højgaard Holding is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 787% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if MT Højgaard Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, MT Højgaard Holding burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

We'd go so far as to say MT Højgaard Holding's conversion of EBIT to free cash flow was disappointing. But at least it's pretty decent at growing its EBIT; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making MT Højgaard Holding stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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. Be aware that MT Højgaard Holding is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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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