These 4 Measures Indicate That Hitron Technologies (TPE:2419) Is Using Debt Reasonably Well

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. We note that Hitron Technologies Inc. (TPE:2419) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Hitron Technologies

What Is Hitron Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Hitron Technologies had NT$2.94b of debt, an increase on NT$1.79b, over one year. But it also has NT$4.00b in cash to offset that, meaning it has NT$1.06b net cash.

A Look At Hitron Technologies' Liabilities

Zooming in on the latest balance sheet data, we can see that Hitron Technologies had liabilities of NT$6.91b due within 12 months and liabilities of NT$67.9m due beyond that. Offsetting this, it had NT$4.00b in cash and NT$2.34b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$627.9m.

Since publicly traded Hitron Technologies shares are worth a total of NT$7.78b, 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, Hitron Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Hitron Technologies saw its EBIT drop by 7.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hitron Technologies's earnings that will influence how the balance sheet holds up in the future. 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 Hitron Technologies 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 three years, Hitron Technologies burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

We could understand if investors are concerned about Hitron Technologies's liabilities, but we can be reassured by the fact it has has net cash of NT$1.06b. So we are not troubled with Hitron Technologies's debt use. 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. For example - Hitron Technologies has 3 warning signs we think you should be aware of.

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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