HTC Purenergy (CVE:HTC) Is Making Moderate Use Of Debt

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.' 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. Importantly, HTC Purenergy Inc. (CVE:HTC) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for HTC Purenergy

How Much Debt Does HTC Purenergy Carry?

As you can see below, at the end of June 2021, HTC Purenergy had CA$5.73m of debt, up from CA$4.10m a year ago. Click the image for more detail. On the flip side, it has CA$176.3k in cash leading to net debt of about CA$5.55m.

A Look At HTC Purenergy's Liabilities

We can see from the most recent balance sheet that HTC Purenergy had liabilities of CA$1.59m falling due within a year, and liabilities of CA$5.94m due beyond that. Offsetting these obligations, it had cash of CA$176.3k as well as receivables valued at CA$33.1k due within 12 months. So its liabilities total CA$7.32m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CA$9.31m, so it does suggest shareholders should keep an eye on HTC Purenergy's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HTC Purenergy will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

It seems likely shareholders hope that HTC Purenergy can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Over the last twelve months HTC Purenergy produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$18m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$105k of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. For example, we've discovered 5 warning signs for HTC Purenergy (4 are concerning!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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