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Himax Technologies (NASDAQ:HIMX) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Himax Technologies, Inc. (NASDAQ:HIMX) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Himax Technologies

What Is Himax Technologies's Debt?

As you can see below, Himax Technologies had US$159.5m of debt at June 2021, down from US$222.4m a year prior. But it also has US$270.4m in cash to offset that, meaning it has US$110.9m net cash.

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

How Strong Is Himax Technologies' Balance Sheet?

The latest balance sheet data shows that Himax Technologies had liabilities of US$458.0m due within a year, and liabilities of US$83.1m falling due after that. Offsetting these obligations, it had cash of US$270.4m as well as receivables valued at US$330.3m due within 12 months. So it actually has US$59.7m more liquid assets than total liabilities.

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This surplus suggests that Himax Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Himax Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Himax Technologies turned things around in the last 12 months, delivering and EBIT of US$270m. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Himax Technologies'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Himax Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Himax Technologies recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Himax Technologies has net cash of US$110.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in US$241m. So we don't think Himax Technologies's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Himax Technologies .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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