These 4 Measures Indicate That Hangcha Group (SHSE:603298) Is Using Debt Reasonably Well

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. We note that Hangcha Group Co., Ltd (SHSE:603298) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out 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 Hangcha Group had debt of CN¥1.00b at the end of September 2023, a reduction from CN¥1.74b over a year. But it also has CN¥3.50b in cash to offset that, meaning it has CN¥2.50b net cash.

How Healthy Is Hangcha Group's Balance Sheet?

The latest balance sheet data shows that Hangcha Group had liabilities of CN¥4.52b due within a year, and liabilities of CN¥181.6m falling due after that. On the other hand, it had cash of CN¥3.50b and CN¥2.57b worth of receivables due within a year. So it can boast CN¥1.38b 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 64% over the last twelve months, and that growth will make it easier to handle its debt. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 created free cash flow amounting to 12% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hangcha Group has CN¥2.50b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 64% over the last year. So is Hangcha Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Hangcha Group , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.