Hexagon Composites (OB:HEX) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hexagon Composites

What Is Hexagon Composites's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hexagon Composites had kr1.78b of debt in June 2023, down from kr1.90b, one year before. However, it does have kr228.8m in cash offsetting this, leading to net debt of about kr1.55b.

How Healthy Is Hexagon Composites' Balance Sheet?

The latest balance sheet data shows that Hexagon Composites had liabilities of kr1.35b due within a year, and liabilities of kr2.34b falling due after that. Offsetting these obligations, it had cash of kr228.8m as well as receivables valued at kr903.7m due within 12 months. So its liabilities total kr2.56b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Hexagon Composites has a market capitalization of kr6.27b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Hexagon Composites wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to kr5.5b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Hexagon Composites managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at kr361m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through kr495m 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. We've identified 2 warning signs with Hexagon Composites (at least 1 which is concerning) , and understanding them should be part of your investment process.

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. 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.