Hygon Information Technology (SHSE:688041) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Hygon Information Technology Co., Ltd. (SHSE:688041) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hygon Information Technology

How Much Debt Does Hygon Information Technology Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Hygon Information Technology had debt of CN¥1.37b, up from CN¥1.07b in one year. But it also has CN¥10.1b in cash to offset that, meaning it has CN¥8.78b net cash.

How Strong Is Hygon Information Technology's Balance Sheet?

We can see from the most recent balance sheet that Hygon Information Technology had liabilities of CN¥1.24b falling due within a year, and liabilities of CN¥1.31b due beyond that. Offsetting this, it had CN¥10.1b in cash and CN¥1.30b in receivables that were due within 12 months. So it actually has CN¥8.90b more liquid assets than total liabilities.

This short term liquidity is a sign that Hygon Information Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hygon Information Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Hygon Information Technology grew its EBIT at 20% over the last year, further increasing its ability to manage 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 Hygon Information Technology 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. Hygon Information Technology 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 three years, Hygon Information Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hygon Information Technology has net cash of CN¥8.78b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 20% over the last year. So we don't have any problem with Hygon Information Technology's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Hygon Information Technology, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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