Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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. As with many other companies Hexaom S.A. (EPA:HEXA) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
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What Is Hexaom's Net Debt?
The image below, which you can click on for greater detail, shows that Hexaom had debt of €65.3m at the end of December 2018, a reduction from €76.9m over a year. However, its balance sheet shows it holds €117.4m in cash, so it actually has €52.1m net cash.
How Strong Is Hexaom's Balance Sheet?
According to the last reported balance sheet, Hexaom had liabilities of €267.7m due within 12 months, and liabilities of €49.1m due beyond 12 months. Offsetting these obligations, it had cash of €117.4m as well as receivables valued at €161.8m due within 12 months. So it has liabilities totalling €37.5m more than its cash and near-term receivables, combined.
Given Hexaom has a market capitalization of €242.5m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Hexaom boasts net cash, so it's fair to say it does not have a heavy debt load!
But the bad news is that Hexaom has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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're focused on the future you can check out this free report showing analyst profit forecasts.