We Think Harboes Bryggeri (CPH:HARB B) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Harboes Bryggeri A/S (CPH:HARB B) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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. 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?

The image below, which you can click on for greater detail, shows that Harboes Bryggeri had debt of kr.111.2m at the end of October 2020, a reduction from kr.129.6m over a year. However, it does have kr.61.0m in cash offsetting this, leading to net debt of about kr.50.1m.

How Strong Is Harboes Bryggeri's Balance Sheet?

The latest balance sheet data shows that Harboes Bryggeri had liabilities of kr.286.1m due within a year, and liabilities of kr.197.9m falling due after that. On the other hand, it had cash of kr.61.0m and kr.219.2m worth of receivables due within a year. So its liabilities total kr.203.7m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of kr.300.7m, so it does suggest shareholders should keep an eye on Harboes Bryggeri's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Harboes Bryggeri's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Harboes Bryggeri saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Harboes Bryggeri had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at kr.19m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of kr.19m. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Harboes Bryggeri (1 is a bit concerning) you should be aware of.

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.

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