These 4 Measures Indicate That H & M Hennes & Mauritz (STO:HM B) Is Using Debt Safely

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 note that H & M Hennes & Mauritz AB (publ) (STO:HM B) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

You can click the graphic below for the historical numbers, but it shows that as of May 2024 H & M Hennes & Mauritz had kr16.3b of debt, an increase on kr12.5b, over one year. But it also has kr24.2b in cash to offset that, meaning it has kr7.96b net cash.

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

According to the last reported balance sheet, H & M Hennes & Mauritz had liabilities of kr72.7b due within 12 months, and liabilities of kr65.8b due beyond 12 months. On the other hand, it had cash of kr24.2b and kr15.5b worth of receivables due within a year. So its liabilities total kr98.7b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because H & M Hennes & Mauritz is worth a massive kr261.7b, 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!

Even more impressive was the fact that H & M Hennes & Mauritz grew its EBIT by 183% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. H & M Hennes & Mauritz may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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 kr7.96b. And it impressed us with free cash flow of kr28b, being 184% of its EBIT. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for H & M Hennes & Mauritz that you should be aware of before investing here.

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.