Does Harm Reduction Group (NGM:NOHARM) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Harm Reduction Group AB (NGM:NOHARM) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 Harm Reduction Group

What Is Harm Reduction Group's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Harm Reduction Group had debt of kr26.1m, up from kr12.1m in one year. However, it also had kr3.31m in cash, and so its net debt is kr22.8m.

How Strong Is Harm Reduction Group's Balance Sheet?

We can see from the most recent balance sheet that Harm Reduction Group had liabilities of kr64.5m falling due within a year, and liabilities of kr25.7m due beyond that. Offsetting these obligations, it had cash of kr3.31m as well as receivables valued at kr12.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr74.3m.

Given this deficit is actually higher than the company's market capitalization of kr67.1m, we think shareholders really should watch Harm Reduction Group's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Harm Reduction Group'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.

In the last year Harm Reduction Group wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to kr180m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Harm Reduction Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at kr6.5m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through kr33m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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, we've discovered 3 warning signs for Harm Reduction Group (1 is a bit concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.