Is Hutchison Telecommunications (Australia) (ASX:HTA) Using Debt Sensibly?

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. We note that Hutchison Telecommunications (Australia) Limited (ASX:HTA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Hutchison Telecommunications (Australia)

How Much Debt Does Hutchison Telecommunications (Australia) Carry?

The image below, which you can click on for greater detail, shows that Hutchison Telecommunications (Australia) had debt of AU$5.36m at the end of December 2022, a reduction from AU$38.3m over a year. But it also has AU$5.81m in cash to offset that, meaning it has AU$449.0k net cash.

A Look At Hutchison Telecommunications (Australia)'s Liabilities

According to the balance sheet data, Hutchison Telecommunications (Australia) had liabilities of AU$6.21m due within 12 months, but no longer term liabilities. Offsetting this, it had AU$5.81m in cash and AU$117.0k in receivables that were due within 12 months. So its liabilities total AU$287.0k more than the combination of its cash and short-term receivables.

Having regard to Hutchison Telecommunications (Australia)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the AU$651.5m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Hutchison Telecommunications (Australia) boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hutchison Telecommunications (Australia) 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.

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.

So How Risky Is Hutchison Telecommunications (Australia)?

While Hutchison Telecommunications (Australia) lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow AU$35m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Hutchison Telecommunications (Australia) is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. 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 1 warning sign with Hutchison Telecommunications (Australia) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.