Is HelloFresh (ETR:HFG) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that HelloFresh SE (ETR:HFG) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for HelloFresh

How Much Debt Does HelloFresh Carry?

The chart below, which you can click on for greater detail, shows that HelloFresh had €159.4m in debt in September 2022; about the same as the year before. But on the other hand it also has €603.7m in cash, leading to a €444.3m net cash position.

A Look At HelloFresh's Liabilities

We can see from the most recent balance sheet that HelloFresh had liabilities of €1.02b falling due within a year, and liabilities of €631.8m due beyond that. Offsetting this, it had €603.7m in cash and €17.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.03b.

HelloFresh has a market capitalization of €4.14b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, HelloFresh also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that HelloFresh's load is not too heavy, because its EBIT was down 53% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 HelloFresh 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While HelloFresh 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. Over the most recent three years, HelloFresh recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although HelloFresh's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €444.3m. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in -€107m. So we are not troubled with HelloFresh's debt use. 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 example - HelloFresh has 2 warning signs we think 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.