Delivery Hero (ETR:DHER) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Delivery Hero SE (ETR:DHER) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that DHER is potentially undervalued!

What Is Delivery Hero's Debt?

As you can see below, at the end of June 2022, Delivery Hero had €5.24b of debt, up from €2.99b a year ago. Click the image for more detail. However, because it has a cash reserve of €3.06b, its net debt is less, at about €2.18b.

A Look At Delivery Hero's Liabilities

We can see from the most recent balance sheet that Delivery Hero had liabilities of €1.82b falling due within a year, and liabilities of €6.25b due beyond that. Offsetting these obligations, it had cash of €3.06b as well as receivables valued at €402.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.61b.

While this might seem like a lot, it is not so bad since Delivery Hero has a huge market capitalization of €10.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Delivery Hero'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.

In the last year Delivery Hero wasn't profitable at an EBIT level, but managed to grow its revenue by 82%, to €7.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Delivery Hero's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable €1.6b at the EBIT level. 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 €1.3b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Delivery Hero (of which 1 is concerning!) you should know about.

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.