H & M Hennes & Mauritz (STO:HM B) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that H & M Hennes & Mauritz AB (publ) (STO:HM B) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for H & M Hennes & Mauritz

How Much Debt Does H & M Hennes & Mauritz Carry?

The image below, which you can click on for greater detail, shows that H & M Hennes & Mauritz had debt of kr14.1b at the end of November 2024, a reduction from kr17.1b over a year. But it also has kr17.3b in cash to offset that, meaning it has kr3.22b net cash.

A Look At H & M Hennes & Mauritz's Liabilities

The latest balance sheet data shows that H & M Hennes & Mauritz had liabilities of kr66.7b due within a year, and liabilities of kr67.4b falling due after that. Offsetting this, it had kr17.3b in cash and kr12.9b in receivables that were due within 12 months. So its liabilities total kr103.8b 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 kr232.2b, 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. 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.

In addition to that, we're happy to report that H & M Hennes & Mauritz has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if H & M Hennes & Mauritz can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, H & M Hennes & Mauritz actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While H & M Hennes & Mauritz does have more liabilities than liquid assets, it also has net cash of kr3.22b. And it impressed us with free cash flow of kr30b, being 190% of its EBIT. So we don't think H & M Hennes & Mauritz's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - H & M Hennes & Mauritz has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.