Hanyu Group (SZSE:300403) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Hanyu Group Joint-Stock Co., Ltd. (SZSE:300403) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hanyu Group

How Much Debt Does Hanyu Group Carry?

As you can see below, at the end of March 2024, Hanyu Group had CN¥36.1m of debt, up from CN¥17.6m a year ago. Click the image for more detail. But on the other hand it also has CN¥183.3m in cash, leading to a CN¥147.3m net cash position.

How Healthy Is Hanyu Group's Balance Sheet?

According to the last reported balance sheet, Hanyu Group had liabilities of CN¥389.8m due within 12 months, and liabilities of CN¥17.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥183.3m as well as receivables valued at CN¥453.3m due within 12 months. So it actually has CN¥229.0m more liquid assets than total liabilities.

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

Also positive, Hanyu Group grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. 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 Hanyu 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, a company can only pay off debt with cold hard cash, not accounting profits. Hanyu 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. During the last three years, Hanyu Group produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hanyu Group has CN¥147.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 30% year-on-year EBIT growth. So is Hanyu 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. For instance, we've identified 1 warning sign for Hanyu Group that you should be aware of.

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.

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