Is HF Company (EPA:HF) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 HF Company SA (EPA:HF) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for HF Company

What Is HF Company's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 HF Company had €3.77m of debt, an increase on €1.44m, over one year. But on the other hand it also has €16.1m in cash, leading to a €12.3m net cash position.

How Strong Is HF Company's Balance Sheet?

According to the last reported balance sheet, HF Company had liabilities of €10.0m due within 12 months, and liabilities of €4.90m due beyond 12 months. Offsetting this, it had €16.1m in cash and €10.9m in receivables that were due within 12 months. So it actually has €12.0m more liquid assets than total liabilities.

This surplus strongly suggests that HF Company has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that HF Company 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 ultimately the future profitability of the business will decide if HF Company 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.

In the last year HF Company had a loss before interest and tax, and actually shrunk its revenue by 9.4%, to €29m. That's not what we would hope to see.

So How Risky Is HF Company?

While HF Company lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €2.6m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. To that end, you should be aware of the 1 warning sign we've spotted with HF Company .

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. 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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