Is Harvest Technology Group (ASX:HTG) Using Debt 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 Harvest Technology Group Ltd (ASX:HTG) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Harvest Technology Group

What Is Harvest Technology Group's Debt?

The chart below, which you can click on for greater detail, shows that Harvest Technology Group had AU$3.62m in debt in June 2021; about the same as the year before. But it also has AU$6.76m in cash to offset that, meaning it has AU$3.14m net cash.

How Healthy Is Harvest Technology Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Harvest Technology Group had liabilities of AU$5.14m due within 12 months and liabilities of AU$3.62m due beyond that. On the other hand, it had cash of AU$6.76m and AU$5.84m worth of receivables due within a year. So it can boast AU$3.83m more liquid assets than total liabilities.

Having regard to Harvest Technology Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the AU$195.9m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Harvest Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Harvest Technology Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Harvest Technology Group had a loss before interest and tax, and actually shrunk its revenue by 28%, to AU$8.3m. To be frank that doesn't bode well.

So How Risky Is Harvest Technology Group?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Harvest Technology Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$9.4m and booked a AU$10m accounting loss. Given it only has net cash of AU$3.14m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Harvest Technology Group (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.

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.

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