Harvest Technology Group (ASX:HTG) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Harvest Technology Group Limited (ASX:HTG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out the opportunities and risks within the AU Electronic industry.

How Much Debt Does Harvest Technology Group Carry?

As you can see below, at the end of June 2022, Harvest Technology Group had AU$3.82m of debt, up from AU$3.62m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$4.50m in cash, so it actually has AU$682.3k net cash.

A Look At Harvest Technology Group's Liabilities

The latest balance sheet data shows that Harvest Technology Group had liabilities of AU$1.91m due within a year, and liabilities of AU$5.42m falling due after that. Offsetting these obligations, it had cash of AU$4.50m as well as receivables valued at AU$744.9k due within 12 months. So it has liabilities totalling AU$2.09m more than its cash and near-term receivables, combined.

Given Harvest Technology Group has a market capitalization of AU$38.3m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Harvest Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Harvest Technology Group 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.

Over 12 months, Harvest Technology Group reported revenue of AU$2.1m, which is a gain of 2.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Harvest Technology Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Harvest Technology Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$9.8m and booked a AU$14m accounting loss. Given it only has net cash of AU$682.3k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should be aware of the 7 warning signs we've spotted with Harvest Technology Group .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.