Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Harvest Technology Group Ltd (ASX:HTG) makes use of debt. But is this debt a concern to shareholders?

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, 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Harvest Technology Group

What Is Harvest Technology Group's Net Debt?

As you can see below, Harvest Technology Group had AU$3.59m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has AU$6.75m in cash to offset that, meaning it has AU$3.16m net cash. debt-equity-history-analysis

How Healthy Is Harvest Technology Group's Balance Sheet?

The latest balance sheet data shows that Harvest Technology Group had liabilities of AU$5.47m due within a year, and liabilities of AU$3.61m falling due after that. On the other hand, it had cash of AU$6.75m and AU$945.8k worth of receivables due within a year. So it has liabilities totalling AU$1.39m more than its cash and near-term receivables, combined.

Having regard to Harvest Technology Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$148.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Harvest Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Harvest Technology Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.



Over 12 months, Harvest Technology Group reported revenue of AU$8.5m, which is a gain of 62%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Harvest Technology Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Harvest Technology Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$2.2m of cash and made a loss of AU$11m. Given it only has net cash of AU$3.16m, the company may need to raise more capital if it doesn't reach break-even soon. Harvest Technology Group's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that  Harvest Technology Group is showing  3 warning signs in our investment analysis, and 1 of those is concerning...

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

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.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.