These 4 Measures Indicate That Hello Group (NASDAQ:MOMO) Is Using Debt Safely

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Hello Group Inc. (NASDAQ:MOMO) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hello Group

How Much Debt Does Hello Group Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Hello Group had debt of CN¥3.51b, up from CN¥2.43b in one year. However, its balance sheet shows it holds CN¥6.31b in cash, so it actually has CN¥2.80b net cash.

A Look At Hello Group's Liabilities

According to the last reported balance sheet, Hello Group had liabilities of CN¥3.45b due within 12 months, and liabilities of CN¥2.66b due beyond 12 months. On the other hand, it had cash of CN¥6.31b and CN¥184.8m worth of receivables due within a year. So it can boast CN¥384.0m more liquid assets than total liabilities.

This surplus suggests that Hello Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hello Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Hello Group grew its EBIT by 4.9% in the last year, making that debt load look even more manageable. 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 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Hello Group 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, Hello Group recorded free cash flow worth a fulsome 82% 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 we empathize with investors who find debt concerning, you should keep in mind that Hello Group has net cash of CN¥2.80b, as well as more liquid assets than liabilities. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in CN¥1.1b. So we don't think Hello Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Hello Group that you should be aware of.

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.

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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.