We Think HELLA GmbH KGaA (ETR:HLE) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies HELLA GmbH & Co. KGaA (ETR:HLE) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out 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 as of September 2024 HELLA GmbH KGaA had €1.17b of debt, an increase on €1.12b, over one year. However, its balance sheet shows it holds €1.22b in cash, so it actually has €51.2m net cash.

How Strong Is HELLA GmbH KGaA's Balance Sheet?

According to the last reported balance sheet, HELLA GmbH KGaA had liabilities of €2.57b due within 12 months, and liabilities of €1.60b due beyond 12 months. Offsetting this, it had €1.22b in cash and €1.48b in receivables that were due within 12 months. So its liabilities total €1.45b more than the combination of its cash and short-term receivables.

Of course, HELLA GmbH KGaA has a titanic market capitalization of €9.87b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, HELLA GmbH KGaA boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, HELLA GmbH KGaA grew its EBIT by 124% last year, which is an impressive improvement. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, HELLA GmbH KGaA's free cash flow amounted to 22% of its EBIT, less than we'd expect. That's not great, when it comes to paying 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 €51.2m. And we liked the look of last year's 124% year-on-year EBIT growth. So we don't have any problem with HELLA GmbH KGaA's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in HELLA GmbH KGaA, you may well want to click here to check an interactive graph of its earnings per share history.

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.