HIVE Blockchain Technologies (CVE:HIVE) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies HIVE Blockchain Technologies Ltd. (CVE:HIVE) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 March 2021 HIVE Blockchain Technologies had debt of US$27.8m, up from US$2.71m in one year. However, its balance sheet shows it holds US$41.3m in cash, so it actually has US$13.4m net cash.

How Healthy Is HIVE Blockchain Technologies' Balance Sheet?

The latest balance sheet data shows that HIVE Blockchain Technologies had liabilities of US$9.86m due within a year, and liabilities of US$34.0m falling due after that. Offsetting these obligations, it had cash of US$41.3m as well as receivables valued at US$6.85m due within 12 months. So it can boast US$4.26m more liquid assets than total liabilities.

Having regard to HIVE Blockchain Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.10b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Although HIVE Blockchain Technologies made a loss at the EBIT level, last year, it was also good to see that it generated US$66m in EBIT over the last twelve months. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While HIVE Blockchain Technologies 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. Over the last year, HIVE Blockchain Technologies saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case HIVE Blockchain Technologies has US$13.4m in net cash and a decent-looking balance sheet. So we don't have any problem with HIVE Blockchain Technologies's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that HIVE Blockchain Technologies is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.

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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