Harris Technology Group (ASX:HT8) Seems To Use Debt Quite Sensibly

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.' 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. Importantly, Harris Technology Group Limited (ASX:HT8) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Harris Technology Group

How Much Debt Does Harris Technology Group Carry?

As you can see below, Harris Technology Group had AU$2.27m of debt at June 2021, down from AU$5.63m a year prior. But it also has AU$3.32m in cash to offset that, meaning it has AU$1.05m net cash.

A Look At Harris Technology Group's Liabilities

The latest balance sheet data shows that Harris Technology Group had liabilities of AU$10.5m due within a year, and liabilities of AU$139.8k falling due after that. Offsetting this, it had AU$3.32m in cash and AU$3.13m in receivables that were due within 12 months. So it has liabilities totalling AU$4.17m more than its cash and near-term receivables, combined.

Given Harris Technology Group has a market capitalization of AU$35.7m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Harris Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Harris Technology Group grew its EBIT by 296% last year, which is an impressive improvement. 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 you can't view debt in total isolation; since Harris Technology Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Harris Technology Group 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. During the last two years, Harris Technology Group burned a lot of cash. 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$1.05m. And we liked the look of last year's 296% year-on-year EBIT growth. So we don't have any problem with Harris Technology Group's use of debt. 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 4 warning signs for Harris Technology Group (1 is a bit unpleasant!) that you should be aware of before investing here.

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.