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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. Importantly, Hilton Food Group plc (LON:HFG) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.
View our latest analysis for Hilton Food Group
What Is Hilton Food Group's Debt?
The image below, which you can click on for greater detail, shows that at December 2018 Hilton Food Group had debt of UK£113.0m, up from UK£53.3m in one year. However, it does have UK£88.0m in cash offsetting this, leading to net debt of about UK£25.0m.
How Healthy Is Hilton Food Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hilton Food Group had liabilities of UK£280.3m due within 12 months and liabilities of UK£115.5m due beyond that. Offsetting these obligations, it had cash of UK£88.0m as well as receivables valued at UK£165.6m due within 12 months. So its liabilities total UK£142.2m more than the combination of its cash and short-term receivables.
Of course, Hilton Food Group has a market capitalization of UK£784.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).