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Is Helloworld Travel (ASX:HLO) Using Debt In A Risky Way?

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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Helloworld Travel Limited (ASX:HLO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Helloworld Travel

How Much Debt Does Helloworld Travel Carry?

As you can see below, Helloworld Travel had AU$80.7m of debt at June 2021, down from AU$100.5m a year prior. But on the other hand it also has AU$131.0m in cash, leading to a AU$50.3m net cash position.

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

How Strong Is Helloworld Travel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Helloworld Travel had liabilities of AU$158.6m due within 12 months and liabilities of AU$139.6m due beyond that. Offsetting this, it had AU$131.0m in cash and AU$45.4m in receivables that were due within 12 months. So it has liabilities totalling AU$121.7m more than its cash and near-term receivables, combined.

Helloworld Travel has a market capitalization of AU$284.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Helloworld Travel also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Helloworld Travel 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.

Over 12 months, Helloworld Travel made a loss at the EBIT level, and saw its revenue drop to AU$94m, which is a fall of 67%. To be frank that doesn't bode well.

So How Risky Is Helloworld Travel?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Helloworld Travel had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$9.2m and booked a AU$35m accounting loss. Given it only has net cash of AU$50.3m, 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 we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Helloworld Travel's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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