Is Happy Helper (CPH:HAPPY) Using Debt In A Risky Way?

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. As with many other companies Happy Helper A/S (CPH:HAPPY) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Happy Helper

What Is Happy Helper's Debt?

As you can see below, at the end of February 2021, Happy Helper had kr.9.96m of debt, up from kr.2.99m a year ago. Click the image for more detail. However, its balance sheet shows it holds kr.12.5m in cash, so it actually has kr.2.57m net cash.

How Healthy Is Happy Helper's Balance Sheet?

The latest balance sheet data shows that Happy Helper had liabilities of kr.3.79m due within a year, and liabilities of kr.9.04m falling due after that. Offsetting these obligations, it had cash of kr.12.5m as well as receivables valued at kr.994.9k due within 12 months. So it can boast kr.696.2k more liquid assets than total liabilities.

This state of affairs indicates that Happy Helper's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the kr.49.2m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Happy Helper has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Happy Helper's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Happy Helper wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to kr.7.8m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Happy Helper?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Happy Helper lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr.2.7m and booked a kr.4.3m accounting loss. Given it only has net cash of kr.2.57m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 3 warning signs with Happy Helper (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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