Is HELLA GmbH KGaA (ETR:HLE) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that HELLA GmbH & Co. KGaA (ETR:HLE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for HELLA GmbH KGaA

What Is HELLA GmbH KGaA's Debt?

You can click the graphic below for the historical numbers, but it shows that HELLA GmbH KGaA had €1.06b of debt in June 2024, down from €1.26b, one year before. However, its balance sheet shows it holds €1.36b in cash, so it actually has €298.7m net cash.

How Strong Is HELLA GmbH KGaA's Balance Sheet?

The latest balance sheet data shows that HELLA GmbH KGaA had liabilities of €2.74b due within a year, and liabilities of €1.63b falling due after that. Offsetting these obligations, it had cash of €1.36b as well as receivables valued at €1.34b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.67b.

Given HELLA GmbH KGaA has a humongous market capitalization of €10.1b, 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. Despite its noteworthy liabilities, HELLA GmbH KGaA boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that HELLA GmbH KGaA grew its EBIT by 610% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine HELLA GmbH KGaA's ability to maintain a healthy balance sheet going forward. 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. 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. Looking at the most recent three years, HELLA GmbH KGaA recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 €298.7m. And we liked the look of last year's 610% year-on-year EBIT growth. So we don't think HELLA GmbH KGaA's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of HELLA GmbH KGaA's earnings per share history for free.

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.