Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Hamburger Hafen und Logistik Aktiengesellschaft (ETR: HHFA) uses debt in his business. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Hamburger Hafen und Logistik
What is the net debt of Hamburger Hafen und Logistik?
You can click on the graph below for historical figures, but it shows that Hamburger Hafen und Logistik had € 576.7 million in debt in March 2021, up from € 605.2 million a year earlier. However, because it has a cash reserve of € 138.3 million, its net debt is lower, at around € 438.4 million.
How strong is Hamburger Hafen und Logistik’s balance sheet?
The most recent balance sheet shows that Hamburger Hafen und Logistik had liabilities of 340.2 million euros due within one year and liabilities of 1.78 billion euros due beyond. In return, he had € 138.3 million in cash and € 269.0 million in receivables due within 12 months. Its liabilities therefore amount to € 1.71 billion more than the combination of its cash and short-term receivables.
When you consider that this deficit exceeds the company’s $ 1.53 billion market capitalization, you may well be inclined to carefully review the balance sheet. Hypothetically, extremely high dilution would be required if the company were forced to repay its debts by raising capital at the current share price.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
While Hamburger Hafen und Logistik’s low debt-to-EBITDA ratio of 1.3 suggests modest use of debt, the fact that EBIT only covered interest costs 7.0 times over the past year makes think. But the interest payments are certainly enough to make us think about how affordable his debt is. In contrast, Hamburger Hafen und Logistik has seen its EBIT fall by 7.6% over the past twelve months. If profits continue to decline at this rate, the company may find it increasingly difficult to manage debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Hamburger Hafen und Logistik can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Hamburger Hafen und Logistik has generated strong free cash flow equivalent to 63% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
While Hamburger Hafen und Logistik’s EBIT growth rate makes us cautious about this, its record in controlling total liabilities is no better. But it’s not that bad to convert EBIT into free cash flow. It should also be noted that Hamburger Hafen und Logistik belongs to the infrastructure sector, which is often seen as quite defensive. In view of the above factors, we believe that the debt of Hamburger Hafen und Logistik presents certain risks to the business. While this debt can increase returns, we believe the company has enough leverage now. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 5 warning signs for Hamburger Hafen und Logistik of which you should be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
If you decide to trade Hamburger Hafen und Logistik, use the cheapest platform * which is ranked # 1 overall by Barron’s, Interactive brokers. Trade stocks, options, futures, currencies, bonds and funds in 135 markets, all from one integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.