Hexagon Composites (OB:HEX) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Hexagon Composites ASA (OB:HEX) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider 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 kr1.11b of debt in June 2021, down from kr1.51b, one year before. However, its balance sheet shows it holds kr1.22b in cash, so it actually has kr114.6m net cash.

How Strong Is Hexagon Composites' Balance Sheet?

According to the last reported balance sheet, Hexagon Composites had liabilities of kr998.8m due within 12 months, and liabilities of kr1.52b due beyond 12 months. Offsetting these obligations, it had cash of kr1.22b as well as receivables valued at kr776.5m due within 12 months. So it has liabilities totalling kr515.2m more than its cash and near-term receivables, combined.

Of course, Hexagon Composites has a market capitalization of kr6.80b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hexagon Composites's ability to maintain a healthy balance sheet going forward. 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 5.2%, to kr3.1b. We would much prefer see growth.

So How Risky Is Hexagon Composites?

While Hexagon Composites lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow kr5.9m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Hexagon Composites's profit, revenue, and operating cashflow have changed over the last few years.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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