Is BHG Group (STO:BHG) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that BHG Group AB (publ) (STO:BHG) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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.

See our latest analysis for BHG Group

How Much Debt Does BHG Group Carry?

You can click the graphic below for the historical numbers, but it shows that BHG Group had kr2.11b of debt in March 2024, down from kr3.29b, one year before. However, because it has a cash reserve of kr323.3m, its net debt is less, at about kr1.78b.

A Look At BHG Group's Liabilities

Zooming in on the latest balance sheet data, we can see that BHG Group had liabilities of kr2.21b due within 12 months and liabilities of kr2.83b due beyond that. Offsetting these obligations, it had cash of kr323.3m as well as receivables valued at kr553.1m due within 12 months. So its liabilities total kr4.16b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of kr2.86b, we think shareholders really should watch BHG Group's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine BHG Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, BHG Group made a loss at the EBIT level, and saw its revenue drop to kr11b, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

Not only did BHG Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost kr109m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of kr1.5b. And until that time we think this is a risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting BHG Group insider transactions.

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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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.