Here's Why Humble Group (STO:HUMBLE) 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.' 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 Humble Group AB (publ) (STO:HUMBLE) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Humble Group

What Is Humble Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Humble Group had kr339.6m of debt, an increase on kr5.66m, over one year. However, because it has a cash reserve of kr147.1m, its net debt is less, at about kr192.5m.

A Look At Humble Group's Liabilities

The latest balance sheet data shows that Humble Group had liabilities of kr342.0m due within a year, and liabilities of kr552.4m falling due after that. Offsetting these obligations, it had cash of kr147.1m as well as receivables valued at kr69.2m due within 12 months. So it has liabilities totalling kr678.1m more than its cash and near-term receivables, combined.

Of course, Humble Group has a market capitalization of kr4.08b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Humble Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Humble Group wasn't profitable at an EBIT level, but managed to grow its revenue by 1,267%, to kr125m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, Humble Group still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr79m at the EBIT level. 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. Another cause for caution is that is bled kr62m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 Humble Group , 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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