Is Hammond Power Solutions (TSE:HPS.A) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Hammond Power Solutions Inc. (TSE:HPS.A) does use debt in its business. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

What Is Hammond Power Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Hammond Power Solutions had CA$41.3m of debt, an increase on CA$13.2m, over one year. On the flip side, it has CA$27.9m in cash leading to net debt of about CA$13.4m.

A Look At Hammond Power Solutions' Liabilities

The latest balance sheet data shows that Hammond Power Solutions had liabilities of CA$182.3m due within a year, and liabilities of CA$17.3m falling due after that. On the other hand, it had cash of CA$27.9m and CA$163.8m worth of receivables due within a year. So its liabilities total CA$7.96m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Hammond Power Solutions' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$1.51b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Hammond Power Solutions has virtually no net debt, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Hammond Power Solutions

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Hammond Power Solutions has a low net debt to EBITDA ratio of only 0.11. And its EBIT easily covers its interest expense, being 54.4 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Another good sign is that Hammond Power Solutions has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hammond Power Solutions can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Hammond Power Solutions reported free cash flow worth 15% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

The good news is that Hammond Power Solutions's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Taking all this data into account, it seems to us that Hammond Power Solutions takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Hammond Power Solutions .

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.