Is HEXPOL (STO:HPOL B) A Risky Investment?

Warren Buffett famously said, '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 HEXPOL AB (publ) (STO:HPOL B) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for HEXPOL

How Much Debt Does HEXPOL Carry?

As you can see below, at the end of June 2022, HEXPOL had kr4.44b of debt, up from kr2.44b a year ago. Click the image for more detail. However, because it has a cash reserve of kr1.55b, its net debt is less, at about kr2.89b.

A Look At HEXPOL's Liabilities

Zooming in on the latest balance sheet data, we can see that HEXPOL had liabilities of kr6.07b due within 12 months and liabilities of kr4.26b due beyond that. Offsetting these obligations, it had cash of kr1.55b as well as receivables valued at kr3.88b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr4.91b.

Since publicly traded HEXPOL shares are worth a total of kr32.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

HEXPOL's net debt is only 0.81 times its EBITDA. And its EBIT easily covers its interest expense, being 219 times the size. So we're pretty relaxed about its super-conservative use of debt. Another good sign is that HEXPOL has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. 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 HEXPOL 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, HEXPOL recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

HEXPOL's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Overall, we don't think HEXPOL is taking any bad risks, as its debt load seems modest. So the balance sheet looks pretty healthy, to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check HEXPOL's dividend history, without delay!

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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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.