Does Hopscotch Global PR Group (EPA:ALHOP) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Hopscotch Global PR Group (EPA:ALHOP) does carry debt. But should shareholders be worried about its use of debt?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hopscotch Global PR Group

How Much Debt Does Hopscotch Global PR Group Carry?

You can click the graphic below for the historical numbers, but it shows that Hopscotch Global PR Group had €27.5m of debt in June 2023, down from €32.5m, one year before. However, it does have €40.0m in cash offsetting this, leading to net cash of €12.5m.

A Look At Hopscotch Global PR Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Hopscotch Global PR Group had liabilities of €117.4m due within 12 months and liabilities of €28.0m due beyond that. On the other hand, it had cash of €40.0m and €79.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €25.9m.

Hopscotch Global PR Group has a market capitalization of €51.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Hopscotch Global PR Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Hopscotch Global PR Group's saving grace is its low debt levels, because its EBIT has tanked 55% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hopscotch Global PR Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hopscotch Global PR Group 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. During the last three years, Hopscotch Global PR Group generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Hopscotch Global PR Group does have more liabilities than liquid assets, it also has net cash of €12.5m. And it impressed us with free cash flow of €9.2m, being 92% of its EBIT. So we are not troubled with Hopscotch Global PR Group's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Hopscotch Global PR Group is showing 3 warning signs in our investment analysis , you should know about...

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.

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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.