Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Delivery Hero SE (ETR:DHER) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Delivery Hero
What Is Delivery Hero's Debt?
The chart below, which you can click on for greater detail, shows that Delivery Hero had €5.13b in debt in December 2023; about the same as the year before. However, it does have €1.66b in cash offsetting this, leading to net debt of about €3.47b.
How Healthy Is Delivery Hero's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Delivery Hero had liabilities of €2.94b due within 12 months and liabilities of €5.89b due beyond that. On the other hand, it had cash of €1.66b and €721.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €6.46b.
This is a mountain of leverage relative to its market capitalization of €8.20b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Delivery Hero 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.
In the last year Delivery Hero wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to €9.9b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Delivery Hero had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €1.7b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €280m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Delivery Hero you should be aware of, and 1 of them is a bit concerning.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
About XTRA:DHER
High growth potential and fair value.
