Is Hyve Group (LON:HYVE) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Hyve Group Plc (LON:HYVE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Hyve Group

How Much Debt Does Hyve Group Carry?

The image below, which you can click on for greater detail, shows that Hyve Group had debt of UK£102.8m at the end of March 2022, a reduction from UK£153.7m over a year. However, it does have UK£38.7m in cash offsetting this, leading to net debt of about UK£64.2m.

A Look At Hyve Group's Liabilities

We can see from the most recent balance sheet that Hyve Group had liabilities of UK£161.7m falling due within a year, and liabilities of UK£140.0m due beyond that. On the other hand, it had cash of UK£38.7m and UK£19.4m worth of receivables due within a year. So it has liabilities totalling UK£243.6m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of UK£177.4m, we think shareholders really should watch Hyve Group's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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 reported revenue of UK£109m, which is a gain of 689%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate Hyve Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping UK£86m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of UK£44m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Hyve Group that you should be aware of.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.