These 4 Measures Indicate That HelloFresh (ETR:HFG) Is Using Debt Extensively

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. Importantly, HelloFresh SE (ETR:HFG) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for HelloFresh

What Is HelloFresh's Net Debt?

The chart below, which you can click on for greater detail, shows that HelloFresh had €165.1m in debt in September 2023; about the same as the year before. But it also has €466.6m in cash to offset that, meaning it has €301.5m net cash.

How Strong Is HelloFresh's Balance Sheet?

The latest balance sheet data shows that HelloFresh had liabilities of €944.5m due within a year, and liabilities of €656.7m falling due after that. On the other hand, it had cash of €466.6m and €18.6m worth of receivables due within a year. So its liabilities total €1.12b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since HelloFresh has a market capitalization of €2.33b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, HelloFresh boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, HelloFresh's EBIT fell a jaw-dropping 32% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 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. 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. In the last three years, HelloFresh's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 €301.5m. So although we see some areas for improvement, we're not too worried about HelloFresh's balance sheet. 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. We've identified 2 warning signs with HelloFresh , and understanding them should be part of your investment process.

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.