Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies HanseYachts SA (ETR:H9Y) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Discover our latest analysis for HanseYachts
What is HanseYachts net debt?
The image below, which you can click on for more details, shows that HanseYachts had a debt of €27.9m at the end of December 2021, a reduction of €29.6m over one year. However, he also had €11.4 million in cash, so his net debt is €16.5 million.
How strong is HanseYachts’ balance sheet?
Zooming in on the latest balance sheet data, we can see that HanseYachts had liabilities of €95.0m due within 12 months and liabilities of €21.3m due beyond. On the other hand, it had €11.4 million in cash and €2.13 million in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €102.8 million.
The deficiency here weighs heavily on the company itself of 65.0 million, like a child struggling under the weight of a huge backpack full of books, his sports equipment and a trumpet. We would therefore be watching his balance sheet closely, no doubt. Ultimately, HanseYachts would likely need a major recapitalization if its creditors were to demand repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether HanseYachts can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Over 12 months, HanseYachts posted revenue of 136 million euros, a gain of 5.3%, although it reported no earnings before interest and taxes. This rate of growth is a little slow for our liking, but it takes all types to make a world.
It is important to note that HanseYachts has recorded a loss of earnings before interest and taxes (EBIT) over the past year. Its EBIT loss was €7.1 million. When we look at this alongside significant liabilities, we are not particularly confident in the business. We would like to see strong improvements in the short term before getting too interested in the title. Not least because he burned 6.6 million euros of negative free cash flow over the past year. That means it’s on the risky side of things. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 3 warning signs for HanseYachts (1 is concerning) that you should be aware of.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.