Yahoo Finance HRL Holdings (ASX:HRL) Is Making Moderate Use Of Debt
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. As with many other companies HRL Holdings Limited (ASX:HRL) makes use of debt. But the real question is whether this debt is making the company risky.
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. 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. 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 think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for HRL Holdings
What Is HRL Holdings's Debt?
As you can see below, at the end of June 2019, HRL Holdings had AU$2.86m of debt, up from AU$1.11m a year ago. Click the image for more detail. However, it also had AU$1.03m in cash, and so its net debt is AU$1.83m.
A Look At HRL Holdings's Liabilities
According to the last reported balance sheet, HRL Holdings had liabilities of AU$6.63m due within 12 months, and liabilities of AU$2.46m due beyond 12 months. On the other hand, it had cash of AU$1.03m and AU$4.99m worth of receivables due within a year. So its liabilities total AU$3.07m more than the combination of its cash and short-term receivables.
Since publicly traded HRL Holdings shares are worth a total of AU$54.3m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 HRL Holdings 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.
In the last year HRL Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by13%, to AU$31m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months HRL Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost AU$1.8m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$6.3m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting HRL Holdings insider transactions.
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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
