Is HelloFresh (ETR:HFG) A Risky Investment?

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. 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.

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. 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. 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.

See our latest analysis for HelloFresh

What Is HelloFresh's Debt?

As you can see below, HelloFresh had €152.6m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has €942.3m in cash to offset that, meaning it has €789.7m net cash.

How Healthy Is HelloFresh's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HelloFresh had liabilities of €722.1m due within 12 months and liabilities of €370.1m due beyond that. On the other hand, it had cash of €942.3m and €26.3m worth of receivables due within a year. So its liabilities total €123.6m more than the combination of its cash and short-term receivables.

Having regard to HelloFresh's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €14.1b company is short on cash, but still worth keeping an eye on the 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 161% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine HelloFresh'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.

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 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 €789.7m in net cash. And it impressed us with free cash flow of €506m, being 111% of its EBIT. So is HelloFresh's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in HelloFresh, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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.

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