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 HT&E Limited (ASX:HT1) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for HT&E
What Is HT&E's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2021 HT&E had debt of AU$67.3m, up from AU$1.82m in one year. However, its balance sheet shows it holds AU$257.1m in cash, so it actually has AU$189.8m net cash.
How Healthy Is HT&E's Balance Sheet?
We can see from the most recent balance sheet that HT&E had liabilities of AU$83.6m falling due within a year, and liabilities of AU$204.6m due beyond that. Offsetting these obligations, it had cash of AU$257.1m as well as receivables valued at AU$51.4m due within 12 months. So it can boast AU$20.2m more liquid assets than total liabilities.
This surplus suggests that HT&E has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that HT&E has more cash than debt is arguably a good indication that it can manage its debt safely.
Notably HT&E's EBIT was pretty flat over the last year. Ideally it can diminish its debt load by kick-starting earnings growth. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine HT&E'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.