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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Hansoh Pharmaceutical Group Company Limited (HKG:3692) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hansoh Pharmaceutical Group

How Much Debt Does Hansoh Pharmaceutical Group Carry?

As you can see below, Hansoh Pharmaceutical Group had CN¥4.22b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥24.9b in cash to offset that, meaning it has CN¥20.7b net cash.

How Strong Is Hansoh Pharmaceutical Group's Balance Sheet?

The latest balance sheet data shows that Hansoh Pharmaceutical Group had liabilities of CN¥6.86b due within a year, and liabilities of CN¥381.5m falling due after that. Offsetting this, it had CN¥24.9b in cash and CN¥3.30b in receivables that were due within 12 months. So it actually has CN¥20.9b more liquid assets than total liabilities.

It's good to see that Hansoh Pharmaceutical Group 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. Succinctly put, Hansoh Pharmaceutical Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Hansoh Pharmaceutical Group grew its EBIT by 2.8% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hansoh Pharmaceutical Group can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. While Hansoh Pharmaceutical 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. During the last three years, Hansoh Pharmaceutical Group generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hansoh Pharmaceutical Group has CN¥20.7b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in CN¥2.8b. So is Hansoh Pharmaceutical Group's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Hansoh Pharmaceutical Group, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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