HBM Holdings (HKG:2142) Seems To Use Debt Quite Sensibly

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.' 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. As with many other companies HBM Holdings Limited (HKG:2142) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for HBM Holdings

What Is HBM Holdings's Debt?

The image below, which you can click on for greater detail, shows that HBM Holdings had debt of US$64.4m at the end of December 2023, a reduction from US$88.2m over a year. However, its balance sheet shows it holds US$140.7m in cash, so it actually has US$76.3m net cash.

How Healthy Is HBM Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HBM Holdings had liabilities of US$64.1m due within 12 months and liabilities of US$44.7m due beyond that. Offsetting this, it had US$140.7m in cash and US$65.3m in receivables that were due within 12 months. So it can boast US$97.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that HBM Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, HBM Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Although HBM Holdings made a loss at the EBIT level, last year, it was also good to see that it generated US$21m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HBM Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While HBM Holdings 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. During the last year, HBM Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HBM Holdings has net cash of US$76.3m, as well as more liquid assets than liabilities. So we are not troubled with HBM Holdings's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for HBM Holdings you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.