Hutchison Telecommunications (Australia) (ASX:HTA) Is Carrying A Fair Bit Of Debt

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 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. We note that Hutchison Telecommunications (Australia) Limited (ASX:HTA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hutchison Telecommunications (Australia)

What Is Hutchison Telecommunications (Australia)'s Net Debt?

The image below, which you can click on for greater detail, shows that Hutchison Telecommunications (Australia) had debt of AU$38.3m at the end of December 2021, a reduction from AU$88.0m over a year. However, it also had AU$3.74m in cash, and so its net debt is AU$34.6m.

A Look At Hutchison Telecommunications (Australia)'s Liabilities

According to the balance sheet data, Hutchison Telecommunications (Australia) had liabilities of AU$38.8m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of AU$3.74m as well as receivables valued at AU$1.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$35.1m.

Since publicly traded Hutchison Telecommunications (Australia) shares are worth a total of AU$1.09b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hutchison Telecommunications (Australia)'s earnings that will influence how the balance sheet holds up in the future. 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.

It seems likely shareholders hope that Hutchison Telecommunications (Australia) can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

While Hutchison Telecommunications (Australia)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at AU$1.8m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of AU$22m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Hutchison Telecommunications (Australia) you should be aware of, and 1 of them shouldn't be ignored.

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.