Does Heritage-Crystal Clean (NASDAQ:HCCI) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Heritage-Crystal Clean, Inc (NASDAQ:HCCI) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, 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 Heritage-Crystal Clean

What Is Heritage-Crystal Clean's Debt?

The chart below, which you can click on for greater detail, shows that Heritage-Crystal Clean had US$29.7m in debt in January 2021; about the same as the year before. But it also has US$67.6m in cash to offset that, meaning it has US$37.9m net cash.

How Healthy Is Heritage-Crystal Clean's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Heritage-Crystal Clean had liabilities of US$73.0m due within 12 months and liabilities of US$111.2m due beyond that. Offsetting these obligations, it had cash of US$67.6m as well as receivables valued at US$48.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$68.1m.

Since publicly traded Heritage-Crystal Clean shares are worth a total of US$666.9m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Heritage-Crystal Clean boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Heritage-Crystal Clean if management cannot prevent a repeat of the 53% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Heritage-Crystal Clean's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Heritage-Crystal Clean may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Heritage-Crystal Clean generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While Heritage-Crystal Clean does have more liabilities than liquid assets, it also has net cash of US$37.9m. And it impressed us with free cash flow of US$21m, being 81% of its EBIT. So we don't have any problem with Heritage-Crystal Clean's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Heritage-Crystal Clean that you should be aware of before investing here.

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. 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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