These 4 Measures Indicate That Hamilton Thorne (CVE:HTL) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?

When Is Debt A Problem?

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 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.

Check out our latest analysis for Hamilton Thorne

What Is Hamilton Thorne's Debt?

The image below, which you can click on for greater detail, shows that Hamilton Thorne had debt of US$6.21m at the end of June 2021, a reduction from US$9.89m over a year. But it also has US$20.6m in cash to offset that, meaning it has US$14.4m net cash.

A Look At Hamilton Thorne's Liabilities

The latest balance sheet data shows that Hamilton Thorne had liabilities of US$11.0m due within a year, and liabilities of US$6.03m falling due after that. Offsetting this, it had US$20.6m in cash and US$3.96m in receivables that were due within 12 months. So it can boast US$7.55m more liquid assets than total liabilities.

This short term liquidity is a sign that Hamilton Thorne could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hamilton Thorne boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Hamilton Thorne has boosted its EBIT by 74%, thus reducing the spectre of future debt repayments. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hamilton Thorne 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. Over the last three years, Hamilton Thorne actually produced more free cash flow than EBIT. 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$14.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$7.8m, being 120% of its EBIT. The bottom line is that we do not find Hamilton Thorne's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hamilton Thorne has 1 warning sign we think you should be aware of.

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.

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.

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