These 4 metrics indicate that HelloFresh (ETR:HFG) is using debt reasonably well

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Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that HelloFresh SE (ETR:HFG) has debt on its balance sheet. But the more important question is: what risk does this debt create?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest analysis for HelloFresh

How much debt does HelloFresh have?

As you can see below, HelloFresh had 156.6 million euros in debt, as of March 2022, roughly the same as the year before. You can click on the graph for more details. However, he has €795.7m in cash which offsets this, leading to a net cash of €639.1m.

XTRA: HFG Debt to Equity History May 3, 2022

How healthy is HelloFresh’s balance sheet?

The latest balance sheet data shows that HelloFresh had liabilities of €1.02 billion due within a year, and liabilities of €465.5 million falling due thereafter. In return for these bonds, it had cash of €795.7 million as well as receivables worth €22.0 million maturing in less than 12 months. It therefore has liabilities totaling 669.1 million euros more than its cash and short-term receivables, combined.

Of course, HelloFresh has a market capitalization of 7.20 billion euros, so these liabilities are probably manageable. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. While it has liabilities worth noting, HelloFresh also has more cash than debt, so we’re pretty confident it can manage its debt safely.

Fortunately, HelloFresh’s load is not too heavy, as its EBIT is down 41% compared to last year. When it comes to paying off debt, lower income is no more helpful than sugary sodas for your health. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether HelloFresh can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the taxman may love accounting profits, lenders only accept cash. HelloFresh may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, HelloFresh has generated free cash flow of a very strong 98% of its EBIT, more than we expected. This positions him well to pay off debt if desired.

Summary

We can understand that investors are worried about HelloFresh’s liabilities, but we can take comfort in the fact that it has a net cash position of 639.1 million euros. The icing on the cake was to convert 98% of this EBIT into free cash flow, bringing in 159 million euros. We are therefore not concerned about HelloFresh’s use of debt. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 2 warning signs with HelloFresh, and understanding them should be part of your investment process.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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