Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Hiolle Industries S.A. (EPA:ALHIO) does carry debt. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Hiolle Industries
What Is Hiolle Industries's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Hiolle Industries had €7.32m of debt in December 2018, down from €8.92m, one year before. On the flip side, it has €7.04m in cash leading to net debt of about €279.0k.
How Strong Is Hiolle Industries's Balance Sheet?
According to the last reported balance sheet, Hiolle Industries had liabilities of €27.6m due within 12 months, and liabilities of €7.53m due beyond 12 months. Offsetting this, it had €7.04m in cash and €38.8m in receivables that were due within 12 months. So it can boast €10.7m more liquid assets than total liabilities.
It's good to see that Hiolle Industries has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Carrying virtually no net debt, Hiolle Industries has a very light debt load indeed.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).