The harsh reality for Health and Plant Protein Group Limited (ASX:HPP) shareholders is that its auditors, PricewaterhouseCoopers LLP, expressed doubts about its ability to continue as a going concern, in its reported results to June 2021. Thus we can say that, based on the results to that date, the company should raise capital or otherwise raise cash, without much delay.
If the company does have to issue more shares, potential investors will be sure to consider how desperate it is for capital. So it is suddenly extremely important to consider whether the company is taking too much risk on its balance sheet. The big consideration is whether it can repay its debt, since in the worst case scenario, creditors could force the company to bankruptcy.
How Much Debt Does Health and Plant Protein Group Carry?
The image below, which you can click on for greater detail, shows that Health and Plant Protein Group had debt of AU$18.6m at the end of June 2021, a reduction from AU$27.0m over a year. On the flip side, it has AU$2.88m in cash leading to net debt of about AU$15.8m.
How Healthy Is Health and Plant Protein Group's Balance Sheet?
According to the last reported balance sheet, Health and Plant Protein Group had liabilities of AU$23.8m due within 12 months, and liabilities of AU$5.23m due beyond 12 months. Offsetting this, it had AU$2.88m in cash and AU$1.58m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$24.6m.
This deficit is considerable relative to its market capitalization of AU$25.5m, so it does suggest shareholders should keep an eye on Health and Plant Protein Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Health and Plant Protein Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Health and Plant Protein Group had a loss before interest and tax, and actually shrunk its revenue by 14%, to AU$36m. That's not what we would hope to see.
While Health and Plant Protein Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable AU$2.7m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$3.5m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. We prefer to avoid a company after its auditor has expressed any uncertainty about its ability to continue as a going concern. That's because companies should always make sure the auditor has confidence that the company will continue as a going concern, in our view. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Health and Plant Protein Group has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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