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

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. As with many other companies Hitron Technologies Inc. (TWSE:2419) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

Check out our latest analysis for Hitron Technologies

How Much Debt Does Hitron Technologies Carry?

As you can see below, Hitron Technologies had NT$2.03b of debt at March 2024, down from NT$2.26b a year prior. However, its balance sheet shows it holds NT$3.08b in cash, so it actually has NT$1.05b net cash.

How Healthy Is Hitron Technologies' Balance Sheet?

We can see from the most recent balance sheet that Hitron Technologies had liabilities of NT$4.36b falling due within a year, and liabilities of NT$1.24b due beyond that. Offsetting this, it had NT$3.08b in cash and NT$2.08b in receivables that were due within 12 months. So it has liabilities totalling NT$446.1m more than its cash and near-term receivables, combined.

Since publicly traded Hitron Technologies shares are worth a total of NT$11.3b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Hitron Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Hitron Technologies's EBIT fell a jaw-dropping 76% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hitron Technologies 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

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$1.05b. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in NT$871m. So we don't have any problem with Hitron Technologies's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hitron Technologies 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com