Is Helloworld Travel (ASX:HLO) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Helloworld Travel Limited (ASX:HLO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Helloworld Travel

What Is Helloworld Travel's Debt?

The image below, which you can click on for greater detail, shows that Helloworld Travel had debt of AU$70.8m at the end of December 2021, a reduction from AU$80.7m over a year. However, its balance sheet shows it holds AU$87.6m in cash, so it actually has AU$16.7m net cash.

How Strong Is Helloworld Travel's Balance Sheet?

The latest balance sheet data shows that Helloworld Travel had liabilities of AU$149.9m due within a year, and liabilities of AU$130.7m falling due after that. On the other hand, it had cash of AU$87.6m and AU$66.9m worth of receivables due within a year. So it has liabilities totalling AU$126.2m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Helloworld Travel is worth AU$344.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 ultimately the future profitability of the business will decide if Helloworld Travel 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.

Over 12 months, Helloworld Travel made a loss at the EBIT level, and saw its revenue drop to AU$81m, which is a fall of 24%. To be frank that doesn't bode well.

So How Risky Is Helloworld Travel?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Helloworld Travel had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$39m and booked a AU$35m accounting loss. Given it only has net cash of AU$16.7m, 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 I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Helloworld Travel insider transactions.

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. 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.