Is Haivision Systems (TSE:HAI) 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.' 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 note that Haivision Systems Inc. (TSE:HAI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Haivision Systems

How Much Debt Does Haivision Systems Carry?

As you can see below, Haivision Systems had CA$4.30m of debt at April 2024, down from CA$13.5m a year prior. However, its balance sheet shows it holds CA$11.2m in cash, so it actually has CA$6.89m net cash.

How Strong Is Haivision Systems' Balance Sheet?

According to the last reported balance sheet, Haivision Systems had liabilities of CA$33.8m due within 12 months, and liabilities of CA$11.4m due beyond 12 months. Offsetting these obligations, it had cash of CA$11.2m as well as receivables valued at CA$26.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$7.09m.

Of course, Haivision Systems has a market capitalization of CA$131.1m, 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. Despite its noteworthy liabilities, Haivision Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Haivision Systems made a loss at the EBIT level, last year, it was also good to see that it generated CA$8.8m in EBIT over the last twelve months. 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 Haivision Systems's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Haivision Systems 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, Haivision Systems actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Haivision Systems's liabilities, but we can be reassured by the fact it has has net cash of CA$6.89m. The cherry on top was that in converted 188% of that EBIT to free cash flow, bringing in CA$17m. So we don't think Haivision Systems's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Haivision Systems 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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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.