Hengan International Group (HKG:1044) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Hengan International Group Company Limited (HKG:1044) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Hengan International Group

What Is Hengan International Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hengan International Group had CN¥20.7b of debt in June 2024, down from CN¥23.9b, one year before. But on the other hand it also has CN¥21.0b in cash, leading to a CN¥353.6m net cash position.

How Healthy Is Hengan International Group's Balance Sheet?

The latest balance sheet data shows that Hengan International Group had liabilities of CN¥22.8b due within a year, and liabilities of CN¥2.60b falling due after that. Offsetting these obligations, it had cash of CN¥21.0b as well as receivables valued at CN¥4.07b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Hengan International Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥24.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Hengan International Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Hengan International Group grew its EBIT at 18% 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 it is future earnings, more than anything, that will determine Hengan International Group'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hengan International Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Hengan International Group recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Hengan International Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥353.6m. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in CN¥1.9b. So we don't think Hengan International Group's use of debt is risky. 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 Hengan International Group that you should be aware of.

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.