We Think Hamilton Thorne (CVE:HTL) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hamilton Thorne Ltd. (CVE:HTL) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

You can click the graphic below for the historical numbers, but it shows that Hamilton Thorne had US$9.11m of debt in September 2020, down from US$10.3m, one year before. However, it does have US$20.0m in cash offsetting this, leading to net cash of US$10.9m.

How Healthy Is Hamilton Thorne's Balance Sheet?

The latest balance sheet data shows that Hamilton Thorne had liabilities of US$10.8m due within a year, and liabilities of US$7.42m falling due after that. Offsetting this, it had US$20.0m in cash and US$3.28m in receivables that were due within 12 months. So it actually has US$5.00m 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 36% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Happily for any shareholders, Hamilton Thorne actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Hamilton Thorne has net cash of US$10.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in US$4.2m. So we are not troubled with Hamilton Thorne's debt use. 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. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Hamilton Thorne you should know about.

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. 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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