The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Romande Energie Holding SA (VTX:HREN) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company 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 and debt together.
Check out our latest analysis for Romande Energie Holding
How Much Debt Does Romande Energie Holding Carry?
As you can see below, at the end of December 2018, Romande Energie Holding had CHF113.2m of debt, up from CHF108.1m a year ago. Click the image for more detail. However, it does have CHF299.9m in cash offsetting this, leading to net cash of CHF186.7m.
A Look At Romande Energie Holding's Liabilities
The latest balance sheet data shows that Romande Energie Holding had liabilities of CHF124.8m due within a year, and liabilities of CHF240.7m falling due after that. On the other hand, it had cash of CHF299.9m and CHF180.4m worth of receivables due within a year. So it actually has CHF114.8m more liquid assets than total liabilities.
This surplus suggests that Romande Energie Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Romande Energie Holding boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that Romande Energie Holding saw its EBIT decline by 3.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Romande Energie Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.