Is HannStar Display (TWSE:6116) Using Too Much Debt?

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.' 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. We note that HannStar Display Corporation (TWSE:6116) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is HannStar Display's Net Debt?

As you can see below, at the end of December 2024, HannStar Display had NT$5.22b of debt, up from NT$2.88b a year ago. Click the image for more detail. However, it does have NT$6.04b in cash offsetting this, leading to net cash of NT$813.4m.

How Strong Is HannStar Display's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HannStar Display had liabilities of NT$6.50b due within 12 months and liabilities of NT$5.26b due beyond that. Offsetting this, it had NT$6.04b in cash and NT$1.96b in receivables that were due within 12 months. So its liabilities total NT$3.76b more than the combination of its cash and short-term receivables.

Since publicly traded HannStar Display shares are worth a total of NT$21.6b, 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. Despite its noteworthy liabilities, HannStar Display boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HannStar Display 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.

See our latest analysis for HannStar Display

Over 12 months, HannStar Display made a loss at the EBIT level, and saw its revenue drop to NT$10.0b, which is a fall of 19%. That's not what we would hope to see.

So How Risky Is HannStar Display?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year HannStar Display had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through NT$5.4b of cash and made a loss of NT$5.3b. However, it has net cash of NT$813.4m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - HannStar Display has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.