Is Hyfusin Group Holdings (HKG:8512) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Hyfusin Group Holdings Limited (HKG:8512) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hyfusin Group Holdings

What Is Hyfusin Group Holdings's Net Debt?

As you can see below, Hyfusin Group Holdings had HK$39.1m of debt at June 2021, down from HK$50.9m a year prior. But on the other hand it also has HK$109.5m in cash, leading to a HK$70.4m net cash position.

How Healthy Is Hyfusin Group Holdings' Balance Sheet?

The latest balance sheet data shows that Hyfusin Group Holdings had liabilities of HK$156.5m due within a year, and liabilities of HK$13.9m falling due after that. Offsetting these obligations, it had cash of HK$109.5m as well as receivables valued at HK$119.5m due within 12 months. So it can boast HK$58.6m more liquid assets than total liabilities.

It's good to see that Hyfusin Group Holdings 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. Simply put, the fact that Hyfusin Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Hyfusin Group Holdings grew its EBIT by 223% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hyfusin Group Holdings will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 created free cash flow amounting to 19% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Hyfusin Group Holdings has HK$70.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 223% over the last year. So is Hyfusin Group Holdings's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Hyfusin Group Holdings (of which 1 is significant!) you should know about.

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.
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