Hanyu Group (SZSE:300403) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Hanyu Group Joint-Stock Co., Ltd. (SZSE:300403) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hanyu Group

What Is Hanyu Group's Net Debt?

As you can see below, at the end of September 2024, Hanyu Group had CN¥58.0m of debt, up from CN¥21.1m a year ago. Click the image for more detail. But on the other hand it also has CN¥58.4m in cash, leading to a CN¥354.3k net cash position.

How Healthy Is Hanyu Group's Balance Sheet?

According to the last reported balance sheet, Hanyu Group had liabilities of CN¥427.6m due within 12 months, and liabilities of CN¥18.5m due beyond 12 months. Offsetting this, it had CN¥58.4m in cash and CN¥479.2m in receivables that were due within 12 months. So it can boast CN¥91.4m more liquid assets than total liabilities.

This state of affairs indicates that Hanyu Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥7.37b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Hanyu Group boasts net cash, so it's fair to say it does not have a heavy debt load!

While Hanyu Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hanyu Group'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hanyu Group 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. During the last three years, Hanyu Group produced sturdy free cash flow equating to 75% 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 we empathize with investors who find debt concerning, you should keep in mind that Hanyu Group has net cash of CN¥354.3k, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥149m, being 75% of its EBIT. 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. Be aware that Hanyu Group is showing 2 warning signs in our investment analysis , you should know about...

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.

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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.