Is Hyve Group (LON:HYVE) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Hyve Group Plc (LON:HYVE) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hyve Group

What Is Hyve Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hyve Group had UK£153.7m of debt in March 2021, down from UK£247.6m, one year before. However, it does have UK£58.0m in cash offsetting this, leading to net debt of about UK£95.8m.

How Healthy Is Hyve Group's Balance Sheet?

According to the last reported balance sheet, Hyve Group had liabilities of UK£112.1m due within 12 months, and liabilities of UK£184.4m due beyond 12 months. On the other hand, it had cash of UK£58.0m and UK£35.1m worth of receivables due within a year. So its liabilities total UK£203.4m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of UK£337.3m, so it does suggest shareholders should keep an eye on Hyve Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hyve Group 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, Hyve Group made a loss at the EBIT level, and saw its revenue drop to UK£25m, which is a fall of 88%. That makes us nervous, to say the least.

Caveat Emptor

While Hyve Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping UK£46m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through UK£20m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hyve Group (of which 1 is potentially serious!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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