Would Hydro-Exploitations Société anonyme (EPA:MLHYE) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Hydro-Exploitations Société anonyme (EPA:MLHYE) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hydro-Exploitations Société anonyme

How Much Debt Does Hydro-Exploitations Société anonyme Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Hydro-Exploitations Société anonyme had €5.88m of debt, an increase on €2.14m, over one year. On the flip side, it has €2.51m in cash leading to net debt of about €3.37m.

A Look At Hydro-Exploitations Société anonyme's Liabilities

Zooming in on the latest balance sheet data, we can see that Hydro-Exploitations Société anonyme had liabilities of €1.18m due within 12 months and liabilities of €7.71m due beyond that. Offsetting these obligations, it had cash of €2.51m as well as receivables valued at €924.0k due within 12 months. So its liabilities total €5.45m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Hydro-Exploitations Société anonyme has a market capitalization of €20.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hydro-Exploitations Société anonyme'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, Hydro-Exploitations Société anonyme made a loss at the EBIT level, and saw its revenue drop to €1.9m, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

While Hydro-Exploitations Société anonyme's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €477k. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €4.1m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 5 warning signs we've spotted with Hydro-Exploitations Société anonyme (including 2 which are a bit unpleasant) .

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. 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.