Hyfusin Group Holdings (HKG:8512) Has A Pretty 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 Hyfusin Group Holdings Limited (HKG:8512) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hyfusin Group Holdings

What Is Hyfusin Group Holdings's Debt?

As you can see below, at the end of December 2021, Hyfusin Group Holdings had HK$65.9m of debt, up from HK$32.1m a year ago. Click the image for more detail. But on the other hand it also has HK$138.3m in cash, leading to a HK$72.4m net cash position.

How Healthy Is Hyfusin Group Holdings' Balance Sheet?

According to the last reported balance sheet, Hyfusin Group Holdings had liabilities of HK$136.2m due within 12 months, and liabilities of HK$16.3m due beyond 12 months. Offsetting these obligations, it had cash of HK$138.3m as well as receivables valued at HK$86.4m due within 12 months. So it actually has HK$72.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Hyfusin Group Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Hyfusin Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Hyfusin Group Holdings has increased its EBIT by 6.0% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hyfusin Group Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hyfusin Group Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Hyfusin Group Holdings's free cash flow amounted to 31% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Hyfusin Group Holdings has HK$72.4m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 6.0% in the last twelve months. So is Hyfusin Group Holdings's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 2 warning signs for Hyfusin Group Holdings that you should be aware of before investing here.

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.