Is Hamilton Thorne (CVE:HTL) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Hamilton Thorne Ltd. (CVE:HTL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Hamilton Thorne

What Is Hamilton Thorne's Net Debt?

As you can see below, Hamilton Thorne had US$8.38m of debt at September 2021, down from US$9.11m a year prior. However, it does have US$18.0m in cash offsetting this, leading to net cash of US$9.67m.

How Strong Is Hamilton Thorne's Balance Sheet?

We can see from the most recent balance sheet that Hamilton Thorne had liabilities of US$10.5m falling due within a year, and liabilities of US$10.3m due beyond that. Offsetting these obligations, it had cash of US$18.0m as well as receivables valued at US$4.56m due within 12 months. So it can boast US$1.77m more liquid assets than total liabilities.

This state of affairs indicates that Hamilton Thorne's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$215.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Hamilton Thorne boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Hamilton Thorne grew its EBIT by 82% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hamilton Thorne'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.

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. Over the last three years, Hamilton Thorne actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Hamilton Thorne has US$9.67m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in US$5.7m. So is Hamilton Thorne's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Hamilton Thorne .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.