Is HTC (TWSE:2498) Using Debt Sensibly?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that HTC Corporation (TWSE:2498) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for HTC

How Much Debt Does HTC Carry?

The image below, which you can click on for greater detail, shows that at September 2024 HTC had debt of NT$15.4b, up from NT$12.1b in one year. However, it does have NT$25.4b in cash offsetting this, leading to net cash of NT$9.99b.

How Strong Is HTC's Balance Sheet?

According to the last reported balance sheet, HTC had liabilities of NT$13.1b due within 12 months, and liabilities of NT$12.1b due beyond 12 months. Offsetting this, it had NT$25.4b in cash and NT$1.02b in receivables that were due within 12 months. So it can boast NT$1.22b more liquid assets than total liabilities.

This surplus suggests that HTC has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that HTC has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HTC can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, HTC made a loss at the EBIT level, and saw its revenue drop to NT$3.3b, which is a fall of 25%. To be frank that doesn't bode well.

So How Risky Is HTC?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months HTC lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$3.3b and booked a NT$3.5b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of NT$9.99b. 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. For riskier companies like HTC I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.