Does HiPay Group (EPA:ALHYP) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that HiPay Group SA (EPA:ALHYP) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the FR IT industry.

What Is HiPay Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 HiPay Group had debt of €25.3m, up from €14.0m in one year. However, it also had €1.51m in cash, and so its net debt is €23.8m.

How Strong Is HiPay Group's Balance Sheet?

According to the last reported balance sheet, HiPay Group had liabilities of €112.8m due within 12 months, and liabilities of €15.3m due beyond 12 months. Offsetting these obligations, it had cash of €1.51m as well as receivables valued at €2.03m due within 12 months. So its liabilities total €124.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €22.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, HiPay Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if HiPay Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year HiPay Group wasn't profitable at an EBIT level, but managed to grow its revenue by 7.6%, to €55m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, HiPay Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable €3.7m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized €4.5m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. Case in point: We've spotted 4 warning signs for HiPay Group you should be aware of, and 1 of them is concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.