Is HIVE Digital Technologies (CVE:HIVE) Using Too Much 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. Importantly, HIVE Digital Technologies Ltd. (CVE:HIVE) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for HIVE Digital Technologies

How Much Debt Does HIVE Digital Technologies Carry?

The image below, which you can click on for greater detail, shows that HIVE Digital Technologies had debt of US$23.9m at the end of December 2023, a reduction from US$26.7m over a year. However, its balance sheet shows it holds US$24.7m in cash, so it actually has US$832.0k net cash.

A Look At HIVE Digital Technologies' Liabilities

According to the last reported balance sheet, HIVE Digital Technologies had liabilities of US$29.9m due within 12 months, and liabilities of US$21.3m due beyond 12 months. Offsetting this, it had US$24.7m in cash and US$2.19m in receivables that were due within 12 months. So its liabilities total US$24.3m more than the combination of its cash and short-term receivables.

Since publicly traded HIVE Digital Technologies shares are worth a total of US$308.4m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, HIVE Digital Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HIVE Digital Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year HIVE Digital Technologies had a loss before interest and tax, and actually shrunk its revenue by 31%, to US$96m. To be frank that doesn't bode well.

So How Risky Is HIVE Digital Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months HIVE Digital Technologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$35m of cash and made a loss of US$41m. With only US$832.0k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for HIVE Digital Technologies you should be aware of, and 2 of them make us uncomfortable.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.