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

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.' 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 can see that Hangcha Group Co., Ltd (SHSE:603298) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View 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¥279.0m at the end of September 2024, a reduction from CN¥981.1m over a year. However, it does have CN¥3.51b in cash offsetting this, leading to net cash of CN¥3.23b.

How Strong Is Hangcha Group's Balance Sheet?

According to the last reported balance sheet, Hangcha Group had liabilities of CN¥4.71b due within 12 months, and liabilities of CN¥407.6m due beyond 12 months. Offsetting this, it had CN¥3.51b in cash and CN¥3.44b in receivables that were due within 12 months. So it can boast CN¥1.82b more liquid assets than total liabilities.

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

Also good is that Hangcha Group grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hangcha Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Hangcha Group recorded free cash flow of 37% of its EBIT, which is weaker 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¥3.23b, as well as more liquid assets than liabilities. And we liked the look of last year's 16% year-on-year EBIT growth. So we don't think Hangcha Group's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Hangcha Group's earnings per share history for free.

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.