Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Himax Technologies, Inc. (NASDAQ:HIMX) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Himax Technologies
What is Himax Technologies’ net debt?
The image below, which you can click on for more details, shows that in December 2021, Himax Technologies had a debt of $203.9 million, compared to $162.5 million in one year. However, he has $364.4 million in cash to offset this, which translates to net cash of $160.5 million.
How strong is Himax Technologies’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Himax Technologies had liabilities of US$601.2 million due within 12 months and liabilities of US$130.0 million due beyond. As compensation for these obligations, it had cash of US$364.4 million and receivables valued at US$411.5 million due within 12 months. He can therefore boast of having $44.7 million in cash more than total Passives.
This surplus suggests that Himax Technologies has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. Simply put, the fact that Himax Technologies has more cash than debt is arguably a good indication that it can safely manage its debt.
Even better, Himax Technologies increased its EBIT by 841% last year, which is an impressive improvement. This boost will make it even easier to pay off debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Himax Technologies can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Although Himax Technologies has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how fast it’s building ( or erodes) that money. balance. Over the past two years, Himax Technologies has recorded free cash flow of 79% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.
If it’s always a good idea to investigate a company’s debt, then Himax Technologies has $160.5 million in net cash and a decent balance sheet. And we liked the look of EBIT growth of 841% YoY last year. We therefore do not believe that the use of debt by Himax Technologies is risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example Himax Technologies has 2 warning signs (and 1 which is a little worrying) that we think you should know about.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.