Would Hydro66 Holdings (CSE:SIX) Be Better Off With Less 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Hydro66 Holdings Corp. (CSE:SIX) does use debt in its business. But should shareholders be worried about its use of debt?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hydro66 Holdings

How Much Debt Does Hydro66 Holdings Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Hydro66 Holdings had debt of CA$5.32m, up from CA$2.73m in one year. However, it also had CA$621.2k in cash, and so its net debt is CA$4.69m.

How Healthy Is Hydro66 Holdings' Balance Sheet?

According to the last reported balance sheet, Hydro66 Holdings had liabilities of CA$2.74m due within 12 months, and liabilities of CA$6.75m due beyond 12 months. Offsetting these obligations, it had cash of CA$621.2k as well as receivables valued at CA$381.2k due within 12 months. So it has liabilities totalling CA$8.49m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Hydro66 Holdings has a market capitalization of CA$30.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Hydro66 Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hydro66 Holdings had a loss before interest and tax, and actually shrunk its revenue by 35%, to CA$3.4m. That makes us nervous, to say the least.

Caveat Emptor

While Hydro66 Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CA$4.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$2.4m of cash over the last year. So in short it's a really risky stock. 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. Be aware that Hydro66 Holdings is showing 5 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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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