High Liner Foods (TSE:HLF) has a somewhat strained balance sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that High Liner Food Incorporated (TSE:HLF) has debt on its balance sheet. But should shareholders worry about its use of debt?

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

Check out our latest analysis for High Liner Foods

What is High Liner Foods Debt?

You can click on the graph below for historical numbers, but it shows that in April 2022, High Liner Foods had $285.1 million in debt, up from $257.3 million, over a year. And he doesn’t have a lot of cash, so his net debt is about the same.

TSX:HLF Debt to Equity July 15, 2022

How strong is High Liner Foods’ balance sheet?

The latest balance sheet data shows that High Liner Foods had liabilities of $187.7 million due within the year, and liabilities of $300.2 million due thereafter. In return, he had $168,000 in cash and $124.2 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and receivables (current) by $363.6 million.

Given that this deficit is actually greater than the company’s market capitalization of $273.1 million, we think shareholders really should be watching High Liner Foods’ debt levels, like a parent watching their child. riding a bike for the first time. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

High Liner Foods has a debt to EBITDA ratio of 3.5 and its EBIT covered its interest expense 4.3 times. This suggests that while debt levels are significant, we will refrain from labeling them as problematic. On a slightly more positive note, High Liner Foods increased its EBIT by 16% compared to last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when analyzing debt. But future earnings, more than anything, will determine High Liner Foods’ 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.

Finally, a company can only repay its debts with cash, not book profits. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, High Liner Foods has produced strong free cash flow equivalent to 57% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

High Liner Foods’ level of total liabilities was a real negative in this analysis, although the other factors we considered cast it in a significantly better light. For example, its EBIT growth rate is relatively strong. Considering the above factors, we believe that High Liner Foods’ debt poses certain risks to the business. So even if this leverage increases return on equity, we wouldn’t really want to see it increase from now on. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 2 High Liner Food Warning Signs you should be aware of, and 1 of them is potentially serious.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

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.