Is HiTi Digital (TPE:3494) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that HiTi Digital, Inc. (TPE:3494) does use debt in its business. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for HiTi Digital

What Is HiTi Digital's Net Debt?

You can click the graphic below for the historical numbers, but it shows that HiTi Digital had NT$969.6m of debt in September 2020, down from NT$1.27b, one year before. However, it does have NT$62.4m in cash offsetting this, leading to net debt of about NT$907.3m.

A Look At HiTi Digital's Liabilities

Zooming in on the latest balance sheet data, we can see that HiTi Digital had liabilities of NT$555.6m due within 12 months and liabilities of NT$833.6m due beyond that. On the other hand, it had cash of NT$62.4m and NT$27.0m worth of receivables due within a year. So its liabilities total NT$1.30b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the NT$800.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, HiTi Digital would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is HiTi Digital's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, HiTi Digital made a loss at the EBIT level, and saw its revenue drop to NT$585m, which is a fall of 49%. To be frank that doesn't bode well.

Caveat Emptor

Not only did HiTi Digital's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable NT$555m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of NT$308m over the last twelve months. That means it's on the risky side of things. 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. We've identified 4 warning signs with HiTi Digital (at least 2 which are significant) , and understanding them should be part of your investment process.

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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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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