Is Hamilton Thorne (CVE:HTL) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Hamilton Thorne Ltd. (CVE:HTL) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hamilton Thorne

What Is Hamilton Thorne's Debt?

As you can see below, Hamilton Thorne had US$8.03m of debt at December 2020, down from US$9.16m a year prior. However, it does have US$21.8m in cash offsetting this, leading to net cash of US$13.8m.

A Look At Hamilton Thorne's Liabilities

We can see from the most recent balance sheet that Hamilton Thorne had liabilities of US$11.7m falling due within a year, and liabilities of US$7.01m due beyond that. Offsetting this, it had US$21.8m in cash and US$3.99m in receivables that were due within 12 months. So it can boast US$7.08m more liquid assets than total liabilities.

This surplus suggests that Hamilton Thorne has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hamilton Thorne has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Hamilton Thorne's EBIT was down 28% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hamilton Thorne 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hamilton Thorne may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Hamilton Thorne actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Hamilton Thorne has US$13.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in US$4.3m. So we are not troubled with Hamilton Thorne's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Hamilton Thorne , and understanding them should be part of your investment process.

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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