Is Obrascón Huarte Lain (BME:OHL) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Obrascón Huarte Lain, S.A. (BME:OHL) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Obrascón Huarte Lain

How Much Debt Does Obrascón Huarte Lain Carry?

As you can see below, Obrascón Huarte Lain had €805.1m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have €481.8m in cash offsetting this, leading to net debt of about €323.3m.

A Look At Obrascón Huarte Lain's Liabilities

We can see from the most recent balance sheet that Obrascón Huarte Lain had liabilities of €1.86b falling due within a year, and liabilities of €833.5m due beyond that. Offsetting this, it had €481.8m in cash and €1.14b in receivables that were due within 12 months. So its liabilities total €1.08b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €178.3m 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 definitely think shareholders need to watch this one closely. After all, Obrascón Huarte Lain would likely require a major re-capitalisation if it had to pay its creditors today. 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 Obrascón Huarte Lain'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.

In the last year Obrascón Huarte Lain had a loss before interest and tax, and actually shrunk its revenue by 4.4%, to €2.8b. We would much prefer see growth.

Caveat Emptor

Importantly, Obrascón Huarte Lain had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €8.5m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through €17m in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Obrascón Huarte Lain that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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