Is Harm Reduction Group (NGM:NOHARM) Using Debt In A Risky Way?

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.' 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 Harm Reduction Group AB (publ) (NGM:NOHARM) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt 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 kr17.8m at the end of December 2023, a reduction from kr26.1m over a year. On the flip side, it has kr3.65m in cash leading to net debt of about kr14.2m.

How Strong Is Harm Reduction Group's Balance Sheet?

We can see from the most recent balance sheet that Harm Reduction Group had liabilities of kr89.9m falling due within a year, and liabilities of kr21.1m due beyond that. On the other hand, it had cash of kr3.65m and kr19.8m worth of receivables due within a year. So it has liabilities totalling kr87.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the kr57.4m 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Harm Reduction Group'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 Harm Reduction Group had a loss before interest and tax, and actually shrunk its revenue by 5.1%, to kr169m. That's not what we would hope to see.

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 kr22m. 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. For example, we would not want to see a repeat of last year's loss of kr25m. 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. For example - Harm Reduction Group has 2 warning signs we think 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.