Is HeartCore Enterprises (NASDAQ:HTCR) A Risky Investment?

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.' 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. We note that HeartCore Enterprises, Inc. (NASDAQ:HTCR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for HeartCore Enterprises

What Is HeartCore Enterprises's Net Debt?

The chart below, which you can click on for greater detail, shows that HeartCore Enterprises had US$2.22m in debt in September 2024; about the same as the year before. But on the other hand it also has US$8.58m in cash, leading to a US$6.37m net cash position.

How Strong Is HeartCore Enterprises' Balance Sheet?

The latest balance sheet data shows that HeartCore Enterprises had liabilities of US$6.53m due within a year, and liabilities of US$4.63m falling due after that. Offsetting these obligations, it had cash of US$8.58m as well as receivables valued at US$2.72m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that HeartCore Enterprises' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$28.7m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, HeartCore Enterprises boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, HeartCore Enterprises turned things around in the last 12 months, delivering and EBIT of US$6.7m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine HeartCore Enterprises'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. HeartCore Enterprises 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 year, HeartCore Enterprises burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HeartCore Enterprises has net cash of US$6.37m, as well as more liquid assets than liabilities. So we don't have any problem with HeartCore Enterprises's use of debt. 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 5 warning signs for HeartCore Enterprises (4 don't sit too well with us) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.