Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. 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. Above all, STRA Hannoversche Verkehrsbetriebe Aktiengesellschaft (FRA: HVB) carries a debt. But should shareholders be concerned about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash flow and debt together.

View our latest review for ÃœSTRA Hannoversche Verkehrsbetriebe

What is the net debt of ÃœSTRA Hannoversche Verkehrsbetriebe?

As you can see below, ÃœSTRA Hannoversche Verkehrsbetriebe had 51.5 million euros in debt in June 2021, compared to 59.0 million euros the previous year. However, his balance sheet shows that he holds 95.2 million euros in cash, so he actually has 43.6 million euros in net cash.

Is ÃœSTRA Hannoversche Verkehrsbetriebe’s balance sheet healthy?

Zooming in on the latest balance sheet data, we can see that ÜSTRA Hannoversche Verkehrsbetriebe had liabilities of 47.6 million euros due within 12 months and liabilities of 410.7 million euros due beyond. . In compensation for these commitments, he had cash of € 95.2 million as well as receivables valued at € 14.4 million within 12 months. It therefore has total liabilities of € 348.7 million more than its combined cash and short-term receivables.

The deficit here weighs heavily on the € 211.2million company itself, as if a child struggles under the weight of a huge backpack full of books, his sports equipment and a trumpet. . We would therefore be watching its record closely, without a doubt. After all, ÃœSTRA Hannoversche Verkehrsbetriebe would likely need a major recapitalization if it were to pay its creditors today. ÃœSTRA Hannoversche Verkehrsbetriebe has a net cash position, so it is fair to say that it does not have a heavy debt, although it does have very large liabilities in total. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since ÃœSTRA Hannoversche Verkehrsbetriebe will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Last year ÃœSTRA Hannoversche Verkehrsbetriebe recorded a loss before interest and taxes and actually reduced its income by 18% to 166 million euros. We would much prefer to see the growth.

So how risky is ÃœSTRA Hannoversche Verkehrsbetriebe?

While ÃœSTRA Hannoversche Verkehrsbetriebe lost money in earnings before interest and taxes (EBIT), it actually generated positive free cash flow of 5.7 million euros. So, although it is in deficit, it does not appear to have too much short-term balance sheet risk, given the net cash position. Given the lack of transparency around future income (and cash flow), we’re nervous about this one, until it makes its first big sales. For us, this is a high risk game. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 1 warning sign we spotted with ÃœSTRA Hannoversche Verkehrsbetriebe.

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 material. Simply Wall St has no position in the mentioned stocks.

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