Is DEUTZ (ETR: DEZ) using too much debt?

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Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that DEUTZ Aktiengesellschaft (ETR: DEZ) uses debt in its business. But the most important question is: what risk does this debt create?

When Is Debt a Problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. 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. When we look at debt levels, we first consider both liquidity and debt levels.

See our latest analysis for DEUTZ

What is DEUTZ’s net debt?

As you can see below, at the end of March 2021 DEUTZ had a debt of 88.5 million euros, up from 54.7 million euros a year ago. Click on the image for more details. However, he also had 57.8 million euros in cash, so his net debt is 30.7 million euros.

XTRA debt history: DEZ on equity July 20, 2021

How strong is DEUTZ’s balance sheet?

According to the latest published balance sheet, DEUTZ had liabilities of 434.0 million euros within 12 months and liabilities of 242.7 million euros due beyond 12 months. In return, he had € 57.8 million in cash and € 159.1 million in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its receivables (short term) by € 459.8 million.

This is a mountain of leverage compared to its market capitalization of 744.5 M €. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine DEUTZ’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Over the past year, DEUTZ has recorded a loss before interest and taxes and in fact reduced its income by 25%, to 1.3 billion euros. To be frank, that doesn’t bode well.

Emptor Warning

While DEUTZ’s declining revenue is about as comforting as a wet hedge, its earnings before interest and taxes (EBIT) are arguably even less appealing. Indeed, it lost 44 M € at the EBIT level. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. We therefore believe that its record is a bit strained, but not irreparable. For example, we wouldn’t want to see a repeat of the loss of 99 million euros from last year. So we think this title is quite risky. For riskier companies like DEUTZ, I always like to keep an eye out for long term profit and income trends. Fortunately, you can click to view our interactive graph of its operating profit, revenue and cash flow.

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.

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