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.' So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. Importantly, HelloFresh SE (ETR:HFG) does carry debt. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for HelloFresh
The chart below, which you can click on for greater detail, shows that HelloFresh had €156.6m in debt in March 2022; about the same as the year before. However, it does have €795.7m in cash offsetting this, leading to net cash of €639.1m.
According to the last reported balance sheet, HelloFresh had liabilities of €1.02b due within 12 months, and liabilities of €465.5m due beyond 12 months. Offsetting this, it had €795.7m in cash and €22.0m in receivables that were due within 12 months. So it has liabilities totalling €669.1m more than its cash and near-term receivables, combined.
Of course, HelloFresh has a market capitalization of €5.29b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, HelloFresh boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that HelloFresh's load is not too heavy, because its EBIT was down 41% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 HelloFresh 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While HelloFresh has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, HelloFresh actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While HelloFresh does have more liabilities than liquid assets, it also has net cash of €639.1m. And it impressed us with free cash flow of €159m, being 107% of its EBIT. So we don't have any problem with HelloFresh's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. Be aware that HelloFresh is showing 2 warning signs in our investment analysis , you should know about…
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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HelloFresh SE delivers meal kit solutions to prepare home-cooked meals using its recipes.
Flawless balance sheet with high growth potential.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
HelloFresh SE delivers meal kit solutions to prepare home-cooked meals using its recipes.
Flawless balance sheet with high growth potential.
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