Health Check: How Prudently Does Harm Reduction Group (NGM:NOHARM) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Harm Reduction Group AB (publ) (NGM:NOHARM) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Harm Reduction Group

What Is Harm Reduction Group's Debt?

The image below, which you can click on for greater detail, shows that Harm Reduction Group had debt of kr18.8m at the end of September 2023, a reduction from kr26.0m over a year. On the flip side, it has kr2.76m in cash leading to net debt of about kr16.0m.

A Look At Harm Reduction Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Harm Reduction Group had liabilities of kr85.9m due within 12 months and liabilities of kr21.8m due beyond that. Offsetting this, it had kr2.76m in cash and kr21.2m in receivables that were due within 12 months. So its liabilities total kr83.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the kr52.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Harm Reduction Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Harm Reduction 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, Harm Reduction Group reported revenue of kr174m, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Harm Reduction Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping kr15m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of kr21m. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Harm Reduction Group you should be aware of, and 2 of them can't be ignored.

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.