David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Harris Technology Group Limited (ASX:HT8) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.
See our latest analysis for Harris Technology Group
What Is Harris Technology Group’s Debt?
The image below, which you can click on for greater detail, shows that Harris Technology Group had debt of AU$2.27m at the end of June 2021, a reduction from AU$5.63m over a year. However, its balance sheet shows it holds AU$3.32m in cash, so it actually has AU$1.05m net cash.
How Healthy Is Harris Technology Group’s Balance Sheet?
We can see from the most recent balance sheet that Harris Technology Group had liabilities of AU$10.5m falling due within a year, and liabilities of AU$139.8k due beyond that. On the other hand, it had cash of AU$3.32m and AU$3.13m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$4.17m.
Since publicly traded Harris Technology Group shares are worth a total of AU$32.8m, 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. While it does have liabilities worth noting, Harris Technology Group also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Even more impressive was the fact that Harris Technology Group grew its EBIT by 296% over twelve months. That boost will make it even easier to pay down debt going forward. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Harris Technology Group 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Harris Technology Group 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 two years, Harris Technology Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
While Harris Technology Group does have more liabilities than liquid assets, it also has net cash of AU$1.05m. And we liked the look of last year’s 296% year-on-year EBIT growth. So we are not troubled with Harris Technology Group’s debt use. 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. Case in point: We’ve spotted 5 warning signs for Harris Technology Group you should be aware of, and 1 of them is a bit concerning.
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.
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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.