Health Check: How Prudently Does Haydale Graphene Industries (LON:HAYD) Use 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 Haydale Graphene Industries plc (LON:HAYD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Haydale Graphene Industries's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Haydale Graphene Industries had debt of UK£1.93m, up from UK£1.39m in one year. However, its balance sheet shows it holds UK£1.99m in cash, so it actually has UK£59.0k net cash.

A Look At Haydale Graphene Industries' Liabilities

According to the last reported balance sheet, Haydale Graphene Industries had liabilities of UK£3.20m due within 12 months, and liabilities of UK£3.50m due beyond 12 months. Offsetting this, it had UK£1.99m in cash and UK£1.78m in receivables that were due within 12 months. So its liabilities total UK£2.93m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Haydale Graphene Industries has a market capitalization of UK£7.08m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 you can't view debt in total isolation; since Haydale Graphene Industries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Haydale Graphene Industries

Over 12 months, Haydale Graphene Industries made a loss at the EBIT level, and saw its revenue drop to UK£3.6m, which is a fall of 28%. That makes us nervous, to say the least.

So How Risky Is Haydale Graphene Industries?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Haydale Graphene Industries lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of UK£3.4m and booked a UK£6.6m accounting loss. With only UK£59.0k 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Haydale Graphene Industries is showing 6 warning signs in our investment analysis , and 4 of those are a bit unpleasant...

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.