HUTCHMED (China) (LON:HCM) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies HUTCHMED (China) Limited (LON:HCM) makes use of debt. But should shareholders be worried about its use of debt?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for HUTCHMED (China)

What Is HUTCHMED (China)'s Debt?

The image below, which you can click on for greater detail, shows that at June 2023 HUTCHMED (China) had debt of US$40.1m, up from US$418.0k in one year. But on the other hand it also has US$858.4m in cash, leading to a US$818.3m net cash position.

A Look At HUTCHMED (China)'s Liabilities

The latest balance sheet data shows that HUTCHMED (China) had liabilities of US$340.9m due within a year, and liabilities of US$156.6m falling due after that. Offsetting this, it had US$858.4m in cash and US$166.1m in receivables that were due within 12 months. So it can boast US$527.1m 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. Due to its strong net asset position, it is not likely to face issues 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 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) wasn't profitable at an EBIT level, but managed to grow its revenue by 89%, to US$757m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is HUTCHMED (China)?

While HUTCHMED (China) lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$2.4m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 89% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. When analysing debt levels, the balance sheet is the obvious place to start. 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 you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.