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

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. Importantly, H & M Hennes & Mauritz AB (publ) (STO:HM B) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 at August 2024 H & M Hennes & Mauritz had debt of kr15.0b, up from kr11.4b in one year. But on the other hand it also has kr23.7b in cash, leading to a kr8.70b net cash position.

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

We can see from the most recent balance sheet that H & M Hennes & Mauritz had liabilities of kr73.5b falling due within a year, and liabilities of kr63.9b due beyond that. Offsetting these obligations, it had cash of kr23.7b as well as receivables valued at kr15.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr98.1b.

This deficit isn't so bad because H & M Hennes & Mauritz is worth a massive kr254.3b, 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. Despite its noteworthy liabilities, H & M Hennes & Mauritz boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that H & M Hennes & Mauritz has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. 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 H & M Hennes & Mauritz's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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 kr8.70b. And it impressed us with free cash flow of kr24b, being 170% of its EBIT. So is H & M Hennes & Mauritz's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that H & M Hennes & Mauritz is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.