Is H & M Hennes & Mauritz (STO:HM B) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 H & M Hennes & Mauritz AB (publ) (STO:HM B) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.

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 at November 2023 H & M Hennes & Mauritz had debt of kr17.1b, up from kr10.8b in one year. However, it does have kr26.4b in cash offsetting this, leading to net cash of kr9.32b.

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

The latest balance sheet data shows that H & M Hennes & Mauritz had liabilities of kr67.9b due within a year, and liabilities of kr65.7b falling due after that. Offsetting this, it had kr26.4b in cash and kr11.2b in receivables that were due within 12 months. So it has liabilities totalling kr96.1b more than its cash and near-term receivables, combined.

H & M Hennes & Mauritz has a very large market capitalization of kr222.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 89%, 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. 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 kr9.32b. The cherry on top was that in converted 235% of that EBIT to free cash flow, bringing in kr25b. So we don't think H & M Hennes & Mauritz's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. 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.

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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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.