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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View 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 CHF300.6m at the end of June 2024, a reduction from CHF324.6m over a year. However, it does have CHF13.7m in cash offsetting this, leading to net debt of about CHF286.9m.

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

According to the last reported balance sheet, Highlight Event and Entertainment had liabilities of CHF534.0m due within 12 months, and liabilities of CHF74.6m due beyond 12 months. Offsetting these obligations, it had cash of CHF13.7m as well as receivables valued at CHF116.5m due within 12 months. So it has liabilities totalling CHF478.5m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CHF81.0m 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'd watch its balance sheet closely, without a doubt. At the end of the day, Highlight Event and Entertainment would probably need a major re-capitalization if its creditors were to demand repayment.

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.

Highlight Event and Entertainment shareholders face the double whammy of a high net debt to EBITDA ratio (15.5), and fairly weak interest coverage, since EBIT is just 0.0025 times the interest expense. This means we'd consider it to have a heavy debt load. One redeeming factor for Highlight Event and Entertainment is that it turned last year's EBIT loss into a gain of CHF46k, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Highlight Event and Entertainment'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Highlight Event and Entertainment burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Highlight Event and Entertainment's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least its EBIT growth rate is not so bad. We think the chances that Highlight Event and Entertainment has too much debt a very significant. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. 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. For instance, we've identified 3 warning signs for Highlight Event and Entertainment (2 are significant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.