HitGen (SHSE:688222) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that HitGen Inc. (SHSE:688222) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for HitGen

What Is HitGen's Debt?

The chart below, which you can click on for greater detail, shows that HitGen had CN¥208.3m in debt in March 2024; about the same as the year before. But it also has CN¥983.8m in cash to offset that, meaning it has CN¥775.4m net cash.

How Strong Is HitGen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HitGen had liabilities of CN¥80.2m due within 12 months and liabilities of CN¥260.1m due beyond that. Offsetting this, it had CN¥983.8m in cash and CN¥86.1m in receivables that were due within 12 months. So it can boast CN¥729.7m more liquid assets than total liabilities.

It's good to see that HitGen has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that HitGen has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, HitGen turned things around in the last 12 months, delivering and EBIT of CN¥49m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HitGen can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. HitGen 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. Over the last year, HitGen actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case HitGen has CN¥775.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 211% of that EBIT to free cash flow, bringing in CN¥103m. So we don't think HitGen's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in HitGen, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.