Höegh Autoliners (OB:HAUTO) Has A Rock Solid 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. We can see that Höegh Autoliners ASA (OB:HAUTO) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Höegh Autoliners

How Much Debt Does Höegh Autoliners Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Höegh Autoliners had debt of US$345.8m, up from US$264.5m in one year. However, it does have US$458.3m in cash offsetting this, leading to net cash of US$112.5m.

A Look At Höegh Autoliners' Liabilities

According to the last reported balance sheet, Höegh Autoliners had liabilities of US$229.3m due within 12 months, and liabilities of US$418.4m due beyond 12 months. On the other hand, it had cash of US$458.3m and US$87.3m worth of receivables due within a year. So its liabilities total US$102.0m more than the combination of its cash and short-term receivables.

Given Höegh Autoliners has a market capitalization of US$1.78b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Höegh Autoliners also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Höegh Autoliners has boosted its EBIT by 100%, thus reducing the spectre of future debt repayments. 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 Höegh Autoliners 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Höegh Autoliners may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Höegh Autoliners actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Höegh Autoliners's liabilities, but we can be reassured by the fact it has has net cash of US$112.5m. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in US$568m. So is Höegh Autoliners's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Höegh Autoliners (2 shouldn't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.