These 4 Measures Indicate That Hammond Power Solutions (TSE:HPS.A) Is Using Debt Reasonably Well

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. Importantly, Hammond Power Solutions Inc. (TSE:HPS.A) does carry debt. But the more important question is: how much risk is that debt creating?

We check all companies for important risks. See what we found for Hammond Power Solutions in our free report.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is Hammond Power Solutions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hammond Power Solutions had CA$13.0m of debt in December 2024, down from CA$18.5m, one year before. But on the other hand it also has CA$34.1m in cash, leading to a CA$21.1m net cash position.

How Strong Is Hammond Power Solutions' Balance Sheet?

According to the last reported balance sheet, Hammond Power Solutions had liabilities of CA$167.5m due within 12 months, and liabilities of CA$17.6m due beyond 12 months. Offsetting this, it had CA$34.1m in cash and CA$145.7m in receivables that were due within 12 months. So it has liabilities totalling CA$5.35m more than its cash and near-term receivables, combined.

Having regard to Hammond Power Solutions' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CA$922.4m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Hammond Power Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Hammond Power Solutions

And we also note warmly that Hammond Power Solutions grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hammond Power Solutions's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hammond Power Solutions has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Hammond Power Solutions's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hammond Power Solutions has CA$21.1m in net cash. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't have any problem with Hammond Power Solutions's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Hammond Power Solutions insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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. 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.