Harris Technology Group (ASX:HT8) Has A Somewhat Strained Balance Sheet

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.' 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 note that Harris Technology Group Limited (ASX:HT8) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Harris Technology Group

What Is Harris Technology Group's Net Debt?

As you can see below, Harris Technology Group had AU$2.52m of debt at December 2022, down from AU$3.00m a year prior. But on the other hand it also has AU$3.06m in cash, leading to a AU$543.9k net cash position.

How Strong Is Harris Technology Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Harris Technology Group had liabilities of AU$7.37m due within 12 months and liabilities of AU$1.54m due beyond that. On the other hand, it had cash of AU$3.06m and AU$2.25m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$3.60m.

This is a mountain of leverage relative to its market capitalization of AU$4.47m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Harris Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Harris Technology Group's EBIT fell a jaw-dropping 79% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Harris Technology Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Harris Technology Group 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. Over the last three years, Harris Technology Group saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Harris Technology Group does have more liabilities than liquid assets, it also has net cash of AU$543.9k. Despite its cash we think that Harris Technology Group seems to struggle to grow its EBIT, so we are wary of the stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Harris Technology Group .

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.