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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Helloworld Travel Limited (ASX:HLO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Helloworld Travel
How Much Debt Does Helloworld Travel Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Helloworld Travel had AU$56.4m of debt, an increase on AU$41.5m, over one year. However, its balance sheet shows it holds AU$204.8m in cash, so it actually has AU$148.3m net cash.
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$324.3m due within 12 months and liabilities of AU$113.0m due beyond that. Offsetting these obligations, it had cash of AU$204.8m as well as receivables valued at AU$150.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$82.4m.
Since publicly traded Helloworld Travel shares are worth a total of AU$558.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Helloworld Travel boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that Helloworld Travel grew its EBIT at 19% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Helloworld Travel's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.