Is Happy Belly Food Group (CSE:HBFG) Weighed On By Its Debt Load?

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 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. Importantly, Happy Belly Food Group Inc. (CSE:HBFG) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Happy Belly Food Group

How Much Debt Does Happy Belly Food Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Happy Belly Food Group had CA$4.33m of debt, an increase on CA$2.94m, over one year. However, its balance sheet shows it holds CA$4.44m in cash, so it actually has CA$106.0k net cash.

A Look At Happy Belly Food Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Happy Belly Food Group had liabilities of CA$3.52m due within 12 months and liabilities of CA$3.68m due beyond that. Offsetting this, it had CA$4.44m in cash and CA$563.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$2.19m.

Of course, Happy Belly Food Group has a market capitalization of CA$77.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Happy Belly Food Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Happy Belly Food Group's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Happy Belly Food Group reported revenue of CA$6.8m, which is a gain of 63%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Happy Belly Food Group?

Although Happy Belly Food Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CA$196k. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that Happy Belly Food Group is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Happy Belly Food Group you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.