HS GovTech Solutions (CSE:HS) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 HS GovTech Solutions Inc. (CSE:HS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for HS GovTech Solutions

What Is HS GovTech Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 HS GovTech Solutions had US$2.95m of debt, an increase on US$23.3k, over one year. On the flip side, it has US$313.9k in cash leading to net debt of about US$2.64m.

How Healthy Is HS GovTech Solutions' Balance Sheet?

The latest balance sheet data shows that HS GovTech Solutions had liabilities of US$4.56m due within a year, and liabilities of US$1.34m falling due after that. On the other hand, it had cash of US$313.9k and US$2.17m worth of receivables due within a year. So its liabilities total US$3.41m more than the combination of its cash and short-term receivables.

Since publicly traded HS GovTech Solutions shares are worth a total of US$20.8m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HS GovTech Solutions 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.

In the last year HS GovTech Solutions had a loss before interest and tax, and actually shrunk its revenue by 3.9%, to US$6.6m. That's not what we would hope to see.

Caveat Emptor

Importantly, HS GovTech Solutions had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$5.4m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$5.9m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for HS GovTech Solutions (of which 3 are a bit concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.