These 4 Measures Indicate That Hut 8 Mining (TSE:HUT) Is Using Debt Reasonably Well – Simply Wall St

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Hut 8 Mining Corp. (TSE:HUT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses 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.

See our latest analysis for Hut 8 Mining

As you can see below, Hut 8 Mining had CA$10.3m of debt at September 2021, down from CA$26.7m a year prior. But it also has CA$226.9m in cash to offset that, meaning it has CA$216.6m net cash.

Zooming in on the latest balance sheet data, we can see that Hut 8 Mining had liabilities of CA$21.9m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of CA$226.9m and CA$111.7m worth of receivables due within a year. So it can boast CA$316.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Hut 8 Mining could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hut 8 Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Hut 8 Mining made a loss at the EBIT level, last year, it was also good to see that it generated CA$31m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hut 8 Mining can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hut 8 Mining 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. Over the last year, Hut 8 Mining saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

While it is always sensible to investigate a company's debt, in this case Hut 8 Mining has CA$216.6m in net cash and a decent-looking balance sheet. So we are not troubled with Hut 8 Mining's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Hut 8 Mining you should be aware of, and 2 of them are significant.

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.

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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These 4 Measures Indicate That Hut 8 Mining (TSE:HUT) Is Using Debt Reasonably Well - Simply Wall St

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