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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that H & M Hennes & Mauritz AB (publ) (STO:HM B) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

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

As you can see below, H & M Hennes & Mauritz had kr13.5b of debt at August 2025, down from kr15.0b a year prior. But on the other hand it also has kr20.4b in cash, leading to a kr6.86b net cash position.

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

The latest balance sheet data shows that H & M Hennes & Mauritz had liabilities of kr71.3b due within a year, and liabilities of kr61.3b falling due after that. Offsetting these obligations, it had cash of kr20.4b as well as receivables valued at kr15.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr96.5b.

This deficit isn't so bad because H & M Hennes & Mauritz is worth a massive kr294.9b, and thus could probably raise enough capital to shore up 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!

See our latest analysis for H & M Hennes & Mauritz

H & M Hennes & Mauritz's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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, 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 kr6.86b. The cherry on top was that in converted 146% of that EBIT to free cash flow, bringing in kr18b. So we are not troubled with H & M Hennes & Mauritz's debt use. 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 - 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.