Health Check: How Prudently Does Hexagon Composites (OB:HEX) Use 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hexagon Composites ASA (OB:HEX) makes use of debt. But the real question is whether this debt is making the company risky.

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Hexagon Composites

How Much Debt Does Hexagon Composites Carry?

You can click the graphic below for the historical numbers, but it shows that Hexagon Composites had kr1.21b of debt in December 2020, down from kr1.30b, one year before. However, it does have kr1.65b in cash offsetting this, leading to net cash of kr443.8m.

How Strong Is Hexagon Composites' Balance Sheet?

We can see from the most recent balance sheet that Hexagon Composites had liabilities of kr911.3m falling due within a year, and liabilities of kr1.71b due beyond that. On the other hand, it had cash of kr1.65b and kr625.8m worth of receivables due within a year. So it has liabilities totalling kr341.0m more than its cash and near-term receivables, combined.

Given Hexagon Composites has a market capitalization of kr9.59b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Hexagon Composites also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Hexagon Composites can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Hexagon Composites had a loss before interest and tax, and actually shrunk its revenue by 9.8%, to kr3.1b. That's not what we would hope to see.

So How Risky Is Hexagon Composites?

Although Hexagon Composites had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of kr177m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Hexagon Composites .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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