Does Happy Belly Food Group (CSE:HBFG) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Happy Belly Food Group Inc. (CSE:HBFG) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Happy Belly Food Group

What Is Happy Belly Food Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Happy Belly Food Group had CA$2.15m of debt, an increase on CA$90.6k, over one year. On the flip side, it has CA$1.16m in cash leading to net debt of about CA$984.0k.

How Healthy Is Happy Belly Food Group's Balance Sheet?

The latest balance sheet data shows that Happy Belly Food Group had liabilities of CA$954.8k due within a year, and liabilities of CA$2.54m falling due after that. Offsetting these obligations, it had cash of CA$1.16m as well as receivables valued at CA$356.9k due within 12 months. So it has liabilities totalling CA$1.98m more than its cash and near-term receivables, combined.

Of course, Happy Belly Food Group has a market capitalization of CA$17.2m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Happy Belly Food 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 Happy Belly Food Group wasn't profitable at an EBIT level, but managed to grow its revenue by 119%, to CA$2.7m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Even though Happy Belly Food Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable CA$1.9m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$1.7m of cash over the last year. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Happy Belly Food Group (of which 1 shouldn't be ignored!) you should know about.

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.