Health Check: How Prudently Does Hydrix (ASX:HYD) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Hydrix Limited (ASX:HYD) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hydrix

What Is Hydrix's Net Debt?

As you can see below, Hydrix had AU$2.75m of debt at December 2020, down from AU$4.64m a year prior. However, its balance sheet shows it holds AU$9.22m in cash, so it actually has AU$6.47m net cash.

How Strong Is Hydrix's Balance Sheet?

The latest balance sheet data shows that Hydrix had liabilities of AU$6.00m due within a year, and liabilities of AU$7.78m falling due after that. Offsetting these obligations, it had cash of AU$9.22m as well as receivables valued at AU$2.08m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$2.48m.

Given Hydrix has a market capitalization of AU$23.6m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Hydrix 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 it is Hydrix'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 Hydrix had a loss before interest and tax, and actually shrunk its revenue by 22%, to AU$13m. That makes us nervous, to say the least.

So How Risky Is Hydrix?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Hydrix had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$2.0m and booked a AU$6.4m accounting loss. But at least it has AU$6.47m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Hydrix (of which 1 shouldn't be ignored!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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