Health Check: How Prudently Does HUTCHMED (China) (LON:HCM) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, HUTCHMED (China) Limited (LON:HCM) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for HUTCHMED (China)

How Much Debt Does HUTCHMED (China) Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 HUTCHMED (China) had US$82.1m of debt, an increase on US$40.1m, over one year. However, its balance sheet shows it holds US$803.5m in cash, so it actually has US$721.4m net cash.

How Strong Is HUTCHMED (China)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HUTCHMED (China) had liabilities of US$373.3m due within 12 months and liabilities of US$135.6m due beyond that. Offsetting these obligations, it had cash of US$803.5m as well as receivables valued at US$187.9m due within 12 months. So it can boast US$482.5m more liquid assets than total liabilities.

It's good to see that HUTCHMED (China) has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, HUTCHMED (China) boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HUTCHMED (China) 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.

In the last year HUTCHMED (China) had a loss before interest and tax, and actually shrunk its revenue by 19%, to US$611m. That's not what we would hope to see.

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 we do note that HUTCHMED (China) had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$65m of cash and made a loss of US$42m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for HUTCHMED (China) that you should be aware of.

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.