HannStar Board (TWSE:5469) Seems To Use Debt Rather Sparingly

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.' 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 HannStar Board Corporation (TWSE:5469) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for HannStar Board

What Is HannStar Board's Net Debt?

As you can see below, HannStar Board had NT$19.7b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$22.0b in cash offsetting this, leading to net cash of NT$2.28b.

A Look At HannStar Board's Liabilities

The latest balance sheet data shows that HannStar Board had liabilities of NT$24.3b due within a year, and liabilities of NT$9.64b falling due after that. Offsetting these obligations, it had cash of NT$22.0b as well as receivables valued at NT$12.4b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to HannStar Board's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$30.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that HannStar Board has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that HannStar Board has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is HannStar Board's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While HannStar Board 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. Happily for any shareholders, HannStar Board actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HannStar Board has net cash of NT$2.28b, as well as more liquid assets than liabilities. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in NT$8.6b. So is HannStar Board's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for HannStar Board that you should be aware of.

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.

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

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.