Does HELLA GmbH KGaA (ETR:HLE) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, HELLA GmbH & Co. KGaA (ETR:HLE) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for HELLA GmbH KGaA

What Is HELLA GmbH KGaA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 HELLA GmbH KGaA had €1.49b of debt, an increase on €1.26b, over one year. However, it does have €1.39b in cash offsetting this, leading to net debt of about €96.8m.

How Healthy Is HELLA GmbH KGaA's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HELLA GmbH KGaA had liabilities of €2.90b due within 12 months and liabilities of €1.67b due beyond that. On the other hand, it had cash of €1.39b and €1.53b worth of receivables due within a year. So it has liabilities totalling €1.65b more than its cash and near-term receivables, combined.

Given HELLA GmbH KGaA has a humongous market capitalization of €9.47b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, HELLA GmbH KGaA has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With net debt sitting at just 0.11 times EBITDA, HELLA GmbH KGaA is arguably pretty conservatively geared. And this view is supported by the solid interest coverage, with EBIT coming in at 8.6 times the interest expense over the last year. It was also good to see that despite losing money on the EBIT line last year, HELLA GmbH KGaA turned things around in the last 12 months, delivering and EBIT of €435m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if HELLA GmbH KGaA can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. In the last year, HELLA GmbH KGaA's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

When it comes to the balance sheet, the standout positive for HELLA GmbH KGaA was the fact that it seems able handle its debt, based on its EBITDA, confidently. But the other factors we noted above weren't so encouraging. For instance it seems like it has to struggle a bit to convert EBIT to free cash flow. When we consider all the elements mentioned above, it seems to us that HELLA GmbH KGaA is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. For example, we've discovered 1 warning sign for HELLA GmbH KGaA that you should be aware of before investing here.

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.