We Think Hitron Technologies (TPE:2419) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Hitron Technologies Inc. (TPE:2419) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at 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 September 2020 Hitron Technologies had NT$2.91b of debt, an increase on NT$1.32b, over one year. But on the other hand it also has NT$4.03b in cash, leading to a NT$1.12b net cash position.

A Look At Hitron Technologies' Liabilities

Zooming in on the latest balance sheet data, we can see that Hitron Technologies had liabilities of NT$5.98b due within 12 months and liabilities of NT$638.3m due beyond that. Offsetting this, it had NT$4.03b in cash and NT$2.50b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Hitron Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$7.25b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 9.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Hitron Technologies will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Hitron Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Hitron Technologies 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

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$1.12b. So we are not troubled with Hitron Technologies's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Hitron Technologies you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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