H & M Hennes & Mauritz (STO:HM B) Seems To Use Debt Quite Sensibly

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 H & M Hennes & Mauritz AB (publ) (STO:HM B) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. 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 think about a company's use of debt, we first look at cash and debt together.

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

As you can see below, H & M Hennes & Mauritz had kr16.9b of debt, at May 2025, which is about the same as the year before. You can click the chart for greater detail. However, it does have kr16.3b in cash offsetting this, leading to net debt of about kr605.0m.

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

Zooming in on the latest balance sheet data, we can see that H & M Hennes & Mauritz had liabilities of kr72.7b due within 12 months and liabilities of kr59.0b due beyond that. Offsetting these obligations, it had cash of kr16.3b as well as receivables valued at kr15.8b due within 12 months. So its liabilities total kr99.7b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since H & M Hennes & Mauritz has a huge market capitalization of kr231.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Carrying virtually no net debt, H & M Hennes & Mauritz has a very light debt load indeed.

Check out our latest analysis for H & M Hennes & Mauritz

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

H & M Hennes & Mauritz has very modest net debt, giving rise to a debt to EBITDA ratio of 0.028. And this impression is enhanced by its strong EBIT which covers interest costs 7.6 times. On the other hand, H & M Hennes & Mauritz's EBIT dived 16%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. 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.

Our View

H & M Hennes & Mauritz's conversion of EBIT to free cash flow was a real positive on this analysis, as was its net debt to EBITDA. In contrast, our confidence was undermined by its apparent struggle to grow its EBIT. When we consider all the elements mentioned above, it seems to us that H & M Hennes & Mauritz is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. For instance, we've identified 1 warning sign for H & M Hennes & Mauritz that you should be aware of.

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.