Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Delivery Hero SE (ETR:DHER) uses debt. But should shareholders worry about its use of debt?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.
See our latest review for Delivery Hero
What is Delivery Hero Debt?
As you can see below, at the end of December 2021, Delivery Hero had €4.16 billion in debt, up from €2.95 billion a year ago. Click on the image for more details. However, he also had €2.45 billion in cash, so his net debt is €1.72 billion.
How strong is Delivery Hero’s balance sheet?
The latest balance sheet data shows that Delivery Hero had liabilities of €1.75 billion due within one year, and liabilities of €5.46 billion falling due thereafter. In compensation for these obligations, it had cash of 2.45 billion euros as well as receivables worth 428.0 million euros at less than 12 months. It therefore has liabilities totaling 4.34 billion euros more than its cash and short-term receivables, combined.
While that might sound like a lot, it’s not that bad since Delivery Hero has a market cap of €8.23 billion, so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt. There is no doubt that we learn the most about debt from the balance sheet. But it’s future revenue, more than anything, that will determine Delivery Hero’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, Delivery Hero was not profitable in terms of EBIT, but managed to increase its turnover by 137%, to 5.9 billion euros. There is therefore no doubt that shareholders encourage growth
Caveat Emptor
Even though Delivery Hero has managed to grow its revenue quite skillfully, the harsh truth is that it is losing money on the EBIT line. Its EBIT loss was €1.5 billion. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. So we think its balance sheet is a little stretched, but not beyond repair. Another reason for caution is that it has lost 1.2 billion euros in negative free cash flow over the past twelve months. In short, it’s a really risky title. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 2 warning signs for Delivery Hero you should be aware.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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