Is HIVE Digital Technologies (CVE:HIVE) Using Too Much 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, HIVE Digital Technologies Ltd. (CVE:HIVE) does carry debt. 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 HIVE Digital Technologies

What Is HIVE Digital Technologies's Debt?

The image below, which you can click on for greater detail, shows that HIVE Digital Technologies had debt of US$24.7m at the end of June 2023, a reduction from US$28.5m over a year. On the flip side, it has US$6.75m in cash leading to net debt of about US$17.9m.

How Strong Is HIVE Digital Technologies' Balance Sheet?

According to the last reported balance sheet, HIVE Digital Technologies had liabilities of US$24.1m due within 12 months, and liabilities of US$22.7m due beyond 12 months. Offsetting these obligations, it had cash of US$6.75m as well as receivables valued at US$4.26m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$35.8m.

Of course, HIVE Digital Technologies has a market capitalization of US$273.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine HIVE Digital Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, HIVE Digital Technologies made a loss at the EBIT level, and saw its revenue drop to US$86m, which is a fall of 60%. That makes us nervous, to say the least.

Caveat Emptor

Not only did HIVE Digital Technologies's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$43m. 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. We would feel better if it turned its trailing twelve month loss of US$137m into a profit. So to be blunt we do think it is risky. 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. For instance, we've identified 2 warning signs for HIVE Digital Technologies (1 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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