Does Hypebeast (HKG:150) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Hypebeast Limited (HKG:150) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Hypebeast

How Much Debt Does Hypebeast Carry?

As you can see below, Hypebeast had HK$13.6m of debt at September 2020, down from HK$28.3m a year prior. But it also has HK$144.2m in cash to offset that, meaning it has HK$130.7m net cash.

How Healthy Is Hypebeast's Balance Sheet?

We can see from the most recent balance sheet that Hypebeast had liabilities of HK$135.4m falling due within a year, and liabilities of HK$70.9m due beyond that. On the other hand, it had cash of HK$144.2m and HK$154.8m worth of receivables due within a year. So it can boast HK$92.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Hypebeast could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hypebeast boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Hypebeast's EBIT dived 16%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hypebeast will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hypebeast 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. In the last three years, Hypebeast's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Hypebeast has HK$130.7m in net cash and a decent-looking balance sheet. So we don't have any problem with Hypebeast's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Hypebeast insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.

If you’re looking to trade Hypebeast, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.