H & M Hennes & Mauritz (STO:HM B) Has A Rock Solid Balance Sheet

Simply Wall St
January 05, 2022
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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. We can see that H & M Hennes & Mauritz AB (publ) (STO:HM B) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for H & M Hennes & Mauritz

What Is H & M Hennes & Mauritz's Net Debt?

The image below, which you can click on for greater detail, shows that H & M Hennes & Mauritz had debt of kr11.1b at the end of August 2021, a reduction from kr18.6b over a year. However, it does have kr35.3b in cash offsetting this, leading to net cash of kr24.2b.

OM:HM B Debt to Equity History January 5th 2022

How Healthy Is H & M Hennes & Mauritz's Balance Sheet?

According to the last reported balance sheet, H & M Hennes & Mauritz had liabilities of kr62.8b due within 12 months, and liabilities of kr58.0b due beyond 12 months. Offsetting these obligations, it had cash of kr35.3b as well as receivables valued at kr12.2b due within 12 months. So it has liabilities totalling kr73.4b more than its cash and near-term receivables, combined.

This deficit isn't so bad because H & M Hennes & Mauritz is worth a massive kr293.9b, 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. While it does have liabilities worth noting, H & M Hennes & Mauritz also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, H & M Hennes & Mauritz grew its EBIT by 182% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine H & M Hennes & Mauritz'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While H & M Hennes & Mauritz has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, H & M Hennes & Mauritz actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although H & M Hennes & Mauritz's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr24.2b. The cherry on top was that in converted 226% of that EBIT to free cash flow, bringing in kr44b. So we don't think H & M Hennes & Mauritz's use of debt is 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. For example, we've discovered 1 warning sign for H & M Hennes & Mauritz that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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