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Is Hunting (LON:HTG) Using Debt Sensibly?

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.' 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 Hunting PLC (LON:HTG) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hunting

What Is Hunting's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Hunting had debt of US$5.40m, up from US$4.60m in one year. But on the other hand it also has US$87.1m in cash, leading to a US$81.7m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Hunting's Liabilities

We can see from the most recent balance sheet that Hunting had liabilities of US$121.4m falling due within a year, and liabilities of US$34.8m due beyond that. Offsetting this, it had US$87.1m in cash and US$188.2m in receivables that were due within 12 months. So it can boast US$119.1m more liquid assets than total liabilities.

It's good to see that Hunting has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Hunting boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hunting can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Hunting wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$613m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Hunting?

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 Hunting had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$11m and booked a US$59m accounting loss. Given it only has net cash of US$81.7m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Hunting may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Hunting (1 can't be ignored) 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.

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

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.

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