Does Highlight Event and Entertainment (VTX:HLEE) Have A Healthy Balance Sheet?

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 note that Highlight Event and Entertainment AG (VTX:HLEE) does have debt on its balance sheet. 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. 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. 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.

Check out our latest analysis for Highlight Event and Entertainment

What Is Highlight Event and Entertainment's Net Debt?

The image below, which you can click on for greater detail, shows that Highlight Event and Entertainment had debt of CHF281.5m at the end of June 2022, a reduction from CHF294.8m over a year. However, it does have CHF18.2m in cash offsetting this, leading to net debt of about CHF263.4m.

How Healthy Is Highlight Event and Entertainment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Highlight Event and Entertainment had liabilities of CHF359.6m due within 12 months and liabilities of CHF206.6m due beyond that. On the other hand, it had cash of CHF18.2m and CHF177.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF370.5m.

The deficiency here weighs heavily on the CHF141.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Highlight Event and Entertainment would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.18 times and a disturbingly high net debt to EBITDA ratio of 14.4 hit our confidence in Highlight Event and Entertainment like a one-two punch to the gut. The debt burden here is substantial. One redeeming factor for Highlight Event and Entertainment is that it turned last year's EBIT loss into a gain of CHF1.9m, over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Highlight Event and Entertainment'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Highlight Event and Entertainment actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

To be frank both Highlight Event and Entertainment's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. We're quite clear that we consider Highlight Event and Entertainment to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Highlight Event and Entertainment you should be aware of.

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.