Here's Why Hexaom (EPA:HEXA) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Hexaom S.A. (EPA:HEXA) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Hexaom

How Much Debt Does Hexaom Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Hexaom had €142.3m of debt, an increase on €81.2m, over one year. However, its balance sheet shows it holds €171.8m in cash, so it actually has €29.5m net cash.

A Look At Hexaom's Liabilities

We can see from the most recent balance sheet that Hexaom had liabilities of €418.1m falling due within a year, and liabilities of €89.8m due beyond that. Offsetting this, it had €171.8m in cash and €84.9m in receivables that were due within 12 months. So its liabilities total €251.2m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €290.3m, so it does suggest shareholders should keep an eye on Hexaom's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Hexaom boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Hexaom grew its EBIT by 5.1% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hexaom 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. While Hexaom has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Hexaom produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Hexaom's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €29.5m. So we don't have any problem with Hexaom's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hexaom you should know about.

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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