Does Hangcha Group (SHSE:603298) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Hangcha Group Co., Ltd (SHSE:603298) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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, 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.

See our latest analysis for Hangcha Group

What Is Hangcha Group's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Hangcha Group had debt of CN¥929.4m, up from CN¥873.1m in one year. But it also has CN¥3.99b in cash to offset that, meaning it has CN¥3.06b net cash.

How Strong Is Hangcha Group's Balance Sheet?

The latest balance sheet data shows that Hangcha Group had liabilities of CN¥5.45b due within a year, and liabilities of CN¥138.8m falling due after that. On the other hand, it had cash of CN¥3.99b and CN¥2.94b worth of receivables due within a year. So it actually has CN¥1.34b more liquid assets than total liabilities.

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

On top of that, Hangcha Group grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hangcha Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hangcha Group 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. In the last three years, Hangcha Group's free cash flow amounted to 25% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hangcha Group has net cash of CN¥3.06b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 54% over the last year. So we don't think Hangcha Group's use of debt is risky. 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. We've identified 1 warning sign with Hangcha Group , and understanding them should be part of your investment process.

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.

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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@simplywallst.com