Hydrix (ASX:HYD) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, '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. Importantly, Hydrix Limited (ASX:HYD) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Hydrix

How Much Debt Does Hydrix Carry?

The image below, which you can click on for greater detail, shows that Hydrix had debt of AU$2.75m at the end of December 2020, a reduction from AU$4.64m over a year. But it also has AU$9.22m in cash to offset that, meaning it has AU$6.47m net cash.

A Look At Hydrix's Liabilities

We can see from the most recent balance sheet that Hydrix had liabilities of AU$6.00m falling due within a year, and liabilities of AU$7.78m due beyond that. On the other hand, it had cash of AU$9.22m and AU$2.08m worth of receivables due within a year. 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$35.8m, 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, Hydrix boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hydrix 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.

In the last year Hydrix had a loss before interest and tax, and actually shrunk its revenue by 22%, to AU$13m. To be frank that doesn't bode well.

So How Risky Is Hydrix?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Hydrix 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$2.0m and booked a AU$6.4m accounting loss. However, it has net cash of AU$6.47m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 3 warning signs with Hydrix (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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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