Is HTC (TPE:2498) A Risky Investment?

Warren Buffett famously said, '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. As with many other companies HTC Corporation (TPE:2498) makes use of debt. But the more important question is: how much risk is that debt creating?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for HTC

What Is HTC's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 HTC had NT$900.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds NT$26.1b in cash, so it actually has NT$25.2b net cash.

A Look At HTC's Liabilities

The latest balance sheet data shows that HTC had liabilities of NT$14.8b due within a year, and liabilities of NT$337.7m falling due after that. Offsetting these obligations, it had cash of NT$26.1b as well as receivables valued at NT$795.8m due within 12 months. So it actually has NT$11.8b more liquid assets than total liabilities.

This excess liquidity is a great indication that HTC's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, HTC 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 HTC's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, HTC made a loss at the EBIT level, and saw its revenue drop to NT$5.8b, which is a fall of 42%. That makes us nervous, to say the least.

So How Risky Is HTC?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that HTC had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$7.7b of cash and made a loss of NT$5.9b. While this does make the company a bit risky, it's important to remember it has net cash of NT$25.2b. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 1 warning sign for HTC that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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