Is HelloFresh (ETR:HFG) A Risky Investment?

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.' 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. We note that HelloFresh SE (ETR:HFG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 HelloFresh

What Is HelloFresh's Net Debt?

As you can see below, at the end of March 2021, HelloFresh had €29.2m of debt, up from €2.70m a year ago. Click the image for more detail. But it also has €883.8m in cash to offset that, meaning it has €854.6m net cash.

How Strong Is HelloFresh's Balance Sheet?

According to the last reported balance sheet, HelloFresh had liabilities of €649.5m due within 12 months, and liabilities of €357.2m due beyond 12 months. Offsetting these obligations, it had cash of €883.8m as well as receivables valued at €14.7m due within 12 months. So it has liabilities totalling €108.2m more than its cash and near-term receivables, combined.

Having regard to HelloFresh's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €14.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Even more impressive was the fact that HelloFresh grew its EBIT by 723% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. HelloFresh may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, HelloFresh actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that HelloFresh has €854.6m in net cash. And it impressed us with free cash flow of €581m, being 122% of its EBIT. So is HelloFresh's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. 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 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.

When trading HelloFresh or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.