We Think Himax Technologies (NASDAQ:HIMX) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Himax Technologies, Inc. (NASDAQ:HIMX) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Himax Technologies

What Is Himax Technologies's Net Debt?

As you can see below, at the end of March 2022, Himax Technologies had US$202.4m of debt, up from US$161.0m a year ago. Click the image for more detail. But on the other hand it also has US$447.1m in cash, leading to a US$244.7m net cash position.

A Look At Himax Technologies' Liabilities

Zooming in on the latest balance sheet data, we can see that Himax Technologies had liabilities of US$647.5m due within 12 months and liabilities of US$132.9m due beyond that. Offsetting these obligations, it had cash of US$447.1m as well as receivables valued at US$443.5m due within 12 months. So it can boast US$110.1m more liquid assets than total liabilities.

This surplus suggests that Himax Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Himax Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Himax Technologies grew its EBIT by 336% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Himax Technologies'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. While Himax 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 two years, Himax Technologies produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Himax Technologies has net cash of US$244.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 336% over the last year. So we don't think Himax Technologies's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Himax Technologies you should be aware of, and 1 of them is significant.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.