Is HUTCHMED (China) (LON:HCM) A Risky Investment?

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.' 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 can see that HUTCHMED (China) Limited (LON:HCM) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for HUTCHMED (China)

How Much Debt Does HUTCHMED (China) Carry?

The image below, which you can click on for greater detail, shows that HUTCHMED (China) had debt of US$18.1m at the end of December 2022, a reduction from US$26.9m over a year. However, it does have US$634.1m in cash offsetting this, leading to net cash of US$616.0m.

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

Zooming in on the latest balance sheet data, we can see that HUTCHMED (China) had liabilities of US$353.9m due within 12 months and liabilities of US$38.7m due beyond that. Offsetting these obligations, it had cash of US$634.1m as well as receivables valued at US$126.7m due within 12 months. So it actually has US$368.3m more liquid assets than total liabilities.

This excess liquidity suggests that HUTCHMED (China) is taking a careful approach to debt. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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) reported revenue of US$426m, which is a gain of 20%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is HUTCHMED (China)?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that HUTCHMED (China) had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$305m and booked a US$361m accounting loss. But at least it has US$616.0m on the balance sheet to spend on growth, near-term. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for HUTCHMED (China) (of which 1 doesn't sit too well with us!) 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.