Does HUTCHMED (China) (LON:HCM) Have A Healthy 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.' 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. We can see that HUTCHMED (China) Limited (LON:HCM) does use debt in its business. 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. 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.

See our latest analysis for HUTCHMED (China)

What Is HUTCHMED (China)'s Debt?

As you can see below, at the end of June 2024, HUTCHMED (China) had US$82.1m of debt, up from US$40.1m a year ago. Click the image for more detail. But on the other hand it also has US$803.5m in cash, leading to a US$721.4m net cash position.

A Look At HUTCHMED (China)'s Liabilities

We can see from the most recent balance sheet that HUTCHMED (China) had liabilities of US$373.3m falling due within a year, and liabilities of US$135.6m due beyond that. Offsetting this, it had US$803.5m in cash and US$187.9m in receivables that were due within 12 months. So it actually has US$482.5m more liquid assets than total liabilities.

This excess liquidity suggests that HUTCHMED (China) is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that HUTCHMED (China) has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine HUTCHMED (China)'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.

Over 12 months, HUTCHMED (China) made a loss at the EBIT level, and saw its revenue drop to US$611m, which is a fall of 19%. We would much prefer see growth.

So How Risky Is HUTCHMED (China)?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months HUTCHMED (China) lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$65m and booked a US$42m accounting loss. But the saving grace is the US$721.4m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that HUTCHMED (China) is showing 1 warning sign 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.