Harboes Bryggeri (CPH:HARB B) 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.' 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 can see that Harboes Bryggeri A/S (CPH:HARB B) does use debt in its business. But the real question is whether this debt is making the company risky.

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 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Harboes Bryggeri

How Much Debt Does Harboes Bryggeri Carry?

You can click the graphic below for the historical numbers, but it shows that Harboes Bryggeri had kr.73.2m of debt in January 2024, down from kr.101.6m, one year before. However, it does have kr.73.7m in cash offsetting this, leading to net cash of kr.489.0k.

How Strong Is Harboes Bryggeri's Balance Sheet?

According to the last reported balance sheet, Harboes Bryggeri had liabilities of kr.372.3m due within 12 months, and liabilities of kr.146.5m due beyond 12 months. Offsetting this, it had kr.73.7m in cash and kr.342.9m in receivables that were due within 12 months. So its liabilities total kr.102.1m more than the combination of its cash and short-term receivables.

Harboes Bryggeri has a market capitalization of kr.504.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Harboes Bryggeri also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Harboes Bryggeri made a loss at the EBIT level, last year, it was also good to see that it generated kr.70m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Harboes Bryggeri 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Harboes Bryggeri 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 last year, Harboes Bryggeri actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Harboes Bryggeri does have more liabilities than liquid assets, it also has net cash of kr.489.0k. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in kr.100m. So we don't think Harboes Bryggeri's use of debt is risky. 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. We've identified 1 warning sign with Harboes Bryggeri , and understanding them should be part of your investment process.

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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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.