Hansoh Pharmaceutical Group (HKG:3692) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Hansoh Pharmaceutical Group Company Limited (HKG:3692) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Hansoh Pharmaceutical Group

What Is Hansoh Pharmaceutical Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Hansoh Pharmaceutical Group had CN¥4.03b of debt, an increase on CN¥3.79b, over one year. However, its balance sheet shows it holds CN¥20.9b in cash, so it actually has CN¥16.9b net cash.

A Look At Hansoh Pharmaceutical Group's Liabilities

We can see from the most recent balance sheet that Hansoh Pharmaceutical Group had liabilities of CN¥3.21b falling due within a year, and liabilities of CN¥4.51b due beyond that. Offsetting this, it had CN¥20.9b in cash and CN¥3.03b in receivables that were due within 12 months. So it can boast CN¥16.3b more liquid assets than total liabilities.

This excess liquidity suggests that Hansoh Pharmaceutical Group is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Hansoh Pharmaceutical Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Hansoh Pharmaceutical Group grew its EBIT by 4.1% in the last year, making that debt load look even more manageable. 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 Hansoh Pharmaceutical Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Hansoh Pharmaceutical Group 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. During the last three years, Hansoh Pharmaceutical Group produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hansoh Pharmaceutical Group has net cash of CN¥16.9b, as well as more liquid assets than liabilities. So is Hansoh Pharmaceutical Group's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Hansoh Pharmaceutical Group's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.