Does Helloworld Travel (ASX:HLO) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Helloworld Travel Limited (ASX:HLO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Helloworld Travel

What Is Helloworld Travel's Debt?

You can click the graphic below for the historical numbers, but it shows that Helloworld Travel had AU$80.7m of debt in December 2020, down from AU$90.4m, one year before. But on the other hand it also has AU$142.7m in cash, leading to a AU$62.0m net cash position.

A Look At Helloworld Travel's Liabilities

The latest balance sheet data shows that Helloworld Travel had liabilities of AU$152.4m due within a year, and liabilities of AU$150.8m falling due after that. On the other hand, it had cash of AU$142.7m and AU$49.0m worth of receivables due within a year. So its liabilities total AU$111.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Helloworld Travel is worth AU$283.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Helloworld Travel boasts net cash, so it's fair to say it does not have a heavy 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 Helloworld Travel's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Helloworld Travel had a loss before interest and tax, and actually shrunk its revenue by 70%, to AU$112m. That makes us nervous, to say the least.

So How Risky Is Helloworld Travel?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Helloworld Travel had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$14m of cash and made a loss of AU$107m. Given it only has net cash of AU$62.0m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Helloworld Travel has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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