These 4 Measures Indicate That Hyfusin Group Holdings (HKG:8512) Is Using Debt Safely

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. Importantly, Hyfusin Group Holdings Limited (HKG:8512) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hyfusin Group Holdings

How Much Debt Does Hyfusin Group Holdings Carry?

The image below, which you can click on for greater detail, shows that Hyfusin Group Holdings had debt of HK$29.7m at the end of December 2020, a reduction from HK$47.0m over a year. However, its balance sheet shows it holds HK$108.4m in cash, so it actually has HK$78.7m net cash.

How Strong Is Hyfusin Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Hyfusin Group Holdings had liabilities of HK$122.2m falling due within a year, and liabilities of HK$7.28m due beyond that. Offsetting this, it had HK$108.4m in cash and HK$91.7m in receivables that were due within 12 months. So it can boast HK$70.6m more liquid assets than total liabilities.

This excess liquidity is a great indication that Hyfusin Group Holdings' balance sheet is almost as strong as Fort Knox. 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!

Even more impressive was the fact that Hyfusin Group Holdings grew its EBIT by 232% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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. While Hyfusin Group Holdings 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. During the last three years, Hyfusin Group Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Hyfusin Group Holdings has net cash of HK$78.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 232% year-on-year EBIT growth. So we don't think Hyfusin Group Holdings's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Hyfusin Group Holdings you should be aware of.

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. 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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