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Is Halo Food (ASX:HLF) Weighed On By Its Debt Load?

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Halo Food Co. Limited (ASX:HLF) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Halo Food

How Much Debt Does Halo Food Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Halo Food had AU$4.76m of debt, an increase on AU$896.2k, over one year. However, it does have AU$7.19m in cash offsetting this, leading to net cash of AU$2.43m.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Halo Food's Balance Sheet?

The latest balance sheet data shows that Halo Food had liabilities of AU$20.4m due within a year, and liabilities of AU$13.0m falling due after that. Offsetting these obligations, it had cash of AU$7.19m as well as receivables valued at AU$10.7m due within 12 months. So it has liabilities totalling AU$15.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of AU$24.0m, so it does suggest shareholders should keep an eye on Halo Food's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Halo Food boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Halo Food's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Halo Food wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to AU$60m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Halo Food?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Halo Food had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$5.4m of cash and made a loss of AU$7.5m. Given it only has net cash of AU$2.43m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Halo Food (of which 1 is a bit unpleasant!) you should know about.

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.

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

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.