Here's Why Hedera Group (STO:HEGR) Can Afford Some 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 Hedera Group AB (publ) (STO:HEGR) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Hedera Group

How Much Debt Does Hedera Group Carry?

As you can see below, at the end of December 2020, Hedera Group had kr30.1m of debt, up from kr26.6m a year ago. Click the image for more detail. However, because it has a cash reserve of kr4.40m, its net debt is less, at about kr25.7m.

How Healthy Is Hedera Group's Balance Sheet?

The latest balance sheet data shows that Hedera Group had liabilities of kr44.3m due within a year, and liabilities of kr27.3m falling due after that. On the other hand, it had cash of kr4.40m and kr43.2m worth of receivables due within a year. So its liabilities total kr24.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Hedera Group is worth kr54.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hedera Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Hedera Group wasn't profitable at an EBIT level, but managed to grow its revenue by 4.0%, to kr218m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Hedera Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr100k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of kr2.0m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hedera Group is showing 4 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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