Here's Why HIVE Blockchain Technologies (CVE:HIVE) Can Manage Its Debt Responsibly

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. As with many other companies HIVE Blockchain Technologies Ltd. (CVE:HIVE) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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.

See our latest analysis for HIVE Blockchain Technologies

What Is HIVE Blockchain Technologies's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 HIVE Blockchain Technologies had debt of US$34.0m, up from US$3.11m in one year. But on the other hand it also has US$90.4m in cash, leading to a US$56.4m net cash position.

A Look At HIVE Blockchain Technologies' Liabilities

The latest balance sheet data shows that HIVE Blockchain Technologies had liabilities of US$15.4m due within a year, and liabilities of US$39.8m falling due after that. Offsetting this, it had US$90.4m in cash and US$10.0m in receivables that were due within 12 months. So it can boast US$45.3m more liquid assets than total liabilities.

This surplus suggests that HIVE Blockchain Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that HIVE Blockchain Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that HIVE Blockchain Technologies grew its EBIT by 481% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if HIVE Blockchain Technologies 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. HIVE Blockchain Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, HIVE Blockchain Technologies burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case HIVE Blockchain Technologies has US$56.4m in net cash and a decent-looking balance sheet. And we liked the look of last year's 481% year-on-year EBIT growth. So we are not troubled with HIVE Blockchain Technologies's debt use. 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. Case in point: We've spotted 5 warning signs for HIVE Blockchain Technologies you should be aware of, and 2 of them make us uncomfortable.

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. 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.