Is Highlight Event and Entertainment (VTX:HLEE) A Risky Investment?

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 can see that Highlight Event and Entertainment AG (VTX:HLEE) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Highlight Event and Entertainment

What Is Highlight Event and Entertainment's Debt?

The chart below, which you can click on for greater detail, shows that Highlight Event and Entertainment had CHF299.8m in debt in December 2022; about the same as the year before. On the flip side, it has CHF42.6m in cash leading to net debt of about CHF257.2m.

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

According to the last reported balance sheet, Highlight Event and Entertainment had liabilities of CHF410.0m due within 12 months, and liabilities of CHF179.1m due beyond 12 months. Offsetting these obligations, it had cash of CHF42.6m as well as receivables valued at CHF135.4m due within 12 months. So its liabilities total CHF411.1m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CHF122.9m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Highlight Event and Entertainment 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.

Over 12 months, Highlight Event and Entertainment made a loss at the EBIT level, and saw its revenue drop to CHF589m, which is a fall of 6.9%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Highlight Event and Entertainment produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CHF4.3m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized CHF9.2m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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 2 warning signs for Highlight Event and Entertainment that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.