Is Hello Group (NASDAQ:MOMO) A Risky Investment?

Warren Buffett famously said, '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 note that Hello Group Inc. (NASDAQ:MOMO) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Hello Group

What Is Hello Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hello Group had CN¥2.43b of debt in June 2023, down from CN¥3.61b, one year before. However, its balance sheet shows it holds CN¥8.17b in cash, so it actually has CN¥5.75b net cash.

How Healthy Is Hello Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hello Group had liabilities of CN¥4.36b due within 12 months and liabilities of CN¥238.9m due beyond that. Offsetting these obligations, it had cash of CN¥8.17b as well as receivables valued at CN¥203.2m due within 12 months. So it actually has CN¥3.78b more liquid assets than total liabilities.

This surplus strongly suggests that Hello Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Hello Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Hello Group has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hello 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hello 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. Over the last three years, Hello Group recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hello Group has CN¥5.75b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥2.2b, being 95% of its EBIT. The bottom line is that we do not find Hello Group's debt levels at all concerning. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Hello Group has 1 warning sign we think you should be aware of.

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.