Is Health and Plant Protein Group (ASX:HPP) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Health and Plant Protein Group Limited (ASX:HPP) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Health and Plant Protein Group

How Much Debt Does Health and Plant Protein Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Health and Plant Protein Group had AU$19.9m of debt, an increase on AU$18.6m, over one year. However, it also had AU$3.48m in cash, and so its net debt is AU$16.5m.

A Look At Health and Plant Protein Group's Liabilities

The latest balance sheet data shows that Health and Plant Protein Group had liabilities of AU$6.69m due within a year, and liabilities of AU$24.4m falling due after that. Offsetting this, it had AU$3.48m in cash and AU$2.17m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$25.4m.

This deficit casts a shadow over the AU$9.83m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Health and Plant Protein Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Health and Plant Protein Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Health and Plant Protein Group wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to AU$42m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Health and Plant Protein Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$5.8m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. However, we note that trailing twelve month EBIT is worse than the free cash flow of AU$576k and the profit of AU$665k. So one might argue that there's still a chance it can get things on the right track. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Health and Plant Protein Group is showing 4 warning signs in our investment analysis , and 2 of those can't be ignored...

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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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.