Here's Why HELLA GmbH KGaA (ETR:HLE) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is HELLA GmbH KGaA's Debt?

As you can see below, HELLA GmbH KGaA had €1.03b of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has €1.32b in cash, leading to a €291.6m net cash position.

How Healthy Is HELLA GmbH KGaA's Balance Sheet?

We can see from the most recent balance sheet that HELLA GmbH KGaA had liabilities of €2.64b falling due within a year, and liabilities of €1.54b due beyond that. On the other hand, it had cash of €1.32b and €1.27b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.59b.

Given HELLA GmbH KGaA has a humongous market capitalization of €9.78b, 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.

View our latest analysis for HELLA GmbH KGaA

In fact HELLA GmbH KGaA's saving grace is its low debt levels, because its EBIT has tanked 25% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. HELLA GmbH KGaA may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, HELLA GmbH KGaA generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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 €291.6m. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in €205m. So we don't have any problem with HELLA GmbH KGaA's use of debt. 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 HELLA GmbH KGaA that 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.