We Think Holaluz-Clidom (BME:HLZ) Is Taking Some Risk With Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Holaluz-Clidom, S.A. (BME:HLZ) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Holaluz-Clidom

What Is Holaluz-Clidom's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Holaluz-Clidom had €22.9m of debt, an increase on €16.6m, over one year. However, it does have €36.9m in cash offsetting this, leading to net cash of €14.0m.

How Strong Is Holaluz-Clidom's Balance Sheet?

We can see from the most recent balance sheet that Holaluz-Clidom had liabilities of €51.7m falling due within a year, and liabilities of €15.7m due beyond that. Offsetting these obligations, it had cash of €36.9m as well as receivables valued at €31.4m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Holaluz-Clidom's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €276.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Holaluz-Clidom has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Holaluz-Clidom made a loss at the EBIT level, last year, but improved that to positive EBIT of €925k in the last twelve months. 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 Holaluz-Clidom'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. Holaluz-Clidom 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. During the last year, Holaluz-Clidom 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.

Summing up

While it is always sensible to investigate a company's debt, in this case Holaluz-Clidom has €14.0m in net cash and a decent-looking balance sheet. So while Holaluz-Clidom does not have a great balance sheet, it's certainly not too bad. 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 Holaluz-Clidom is showing 3 warning signs in our investment analysis , and 2 of those are 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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This article by Simply Wall St is general in nature. 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.
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