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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that ÜSTRA Hannoversche Verkehrsbetriebe Aktiengesellschaft (FRA:HVB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for ÜSTRA Hannoversche Verkehrsbetriebe
What Is ÜSTRA Hannoversche Verkehrsbetriebe's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 ÜSTRA Hannoversche Verkehrsbetriebe had €44.2m of debt, an increase on €30.1m, over one year. But on the other hand it also has €75.7m in cash, leading to a €31.6m net cash position.
How Strong Is ÜSTRA Hannoversche Verkehrsbetriebe's Balance Sheet?
According to the last reported balance sheet, ÜSTRA Hannoversche Verkehrsbetriebe had liabilities of €94.3m due within 12 months, and liabilities of €309.1m due beyond 12 months. Offsetting these obligations, it had cash of €75.7m as well as receivables valued at €21.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €306.6m.
The deficiency here weighs heavily on the €158.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt At the end of the day, ÜSTRA Hannoversche Verkehrsbetriebe would probably need a major re-capitalization if its creditors were to demand repayment. Given that ÜSTRA Hannoversche Verkehrsbetriebe has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ÜSTRA Hannoversche Verkehrsbetriebe will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.