Haydale Graphene Industries (LON:HAYD) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Haydale Graphene Industries plc (LON:HAYD) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Haydale Graphene Industries

What Is Haydale Graphene Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Haydale Graphene Industries had UK£1.32m of debt in December 2021, down from UK£1.73m, one year before. However, it does have UK£3.84m in cash offsetting this, leading to net cash of UK£2.52m.

How Healthy Is Haydale Graphene Industries' Balance Sheet?

We can see from the most recent balance sheet that Haydale Graphene Industries had liabilities of UK£1.71m falling due within a year, and liabilities of UK£4.81m due beyond that. Offsetting this, it had UK£3.84m in cash and UK£1.52m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£1.15m.

Since publicly traded Haydale Graphene Industries shares are worth a total of UK£19.9m, 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. Despite its noteworthy liabilities, Haydale Graphene Industries boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Haydale Graphene Industries'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, Haydale Graphene Industries made a loss at the EBIT level, and saw its revenue drop to UK£2.8m, which is a fall of 2.1%. We would much prefer see growth.

So How Risky Is Haydale Graphene Industries?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Haydale Graphene Industries had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through UK£2.3m of cash and made a loss of UK£3.9m. Given it only has net cash of UK£2.52m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 6 warning signs for Haydale Graphene Industries you should be aware of, and 1 of them is concerning.

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.