HELLA GmbH KGaA (ETR:HLE) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, HELLA GmbH & Co. KGaA (ETR:HLE) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is HELLA GmbH KGaA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that HELLA GmbH KGaA had €1.04b of debt in December 2024, down from €1.12b, one year before. But it also has €1.40b in cash to offset that, meaning it has €357.1m net cash.

How Strong Is HELLA GmbH KGaA's Balance Sheet?

We can see from the most recent balance sheet that HELLA GmbH KGaA had liabilities of €2.62b falling due within a year, and liabilities of €1.61b due beyond that. Offsetting these obligations, it had cash of €1.40b as well as receivables valued at €1.24b due within 12 months. So it has liabilities totalling €1.59b more than its cash and near-term receivables, combined.

Given HELLA GmbH KGaA has a humongous market capitalization of €9.83b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, HELLA GmbH KGaA also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for HELLA GmbH KGaA

It is just as well that HELLA GmbH KGaA's load is not too heavy, because its EBIT was down 30% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While HELLA GmbH KGaA has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, HELLA GmbH KGaA produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although HELLA GmbH KGaA's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €357.1m. So we are not troubled with HELLA GmbH KGaA's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that HELLA GmbH KGaA is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.