Hansoh Pharmaceutical Group (HKG:3692) Seems To Use Debt Rather Sparingly

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 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. As with many other companies Hansoh Pharmaceutical Group Company Limited (HKG:3692) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 Hansoh Pharmaceutical Group had CN¥40.3m of debt in June 2024, down from CN¥4.46b, one year before. However, its balance sheet shows it holds CN¥23.5b in cash, so it actually has CN¥23.5b net cash.

How Healthy Is Hansoh Pharmaceutical Group's Balance Sheet?

We can see from the most recent balance sheet that Hansoh Pharmaceutical Group had liabilities of CN¥3.43b falling due within a year, and liabilities of CN¥336.6m due beyond that. On the other hand, it had cash of CN¥23.5b and CN¥2.94b worth of receivables due within a year. So it can boast CN¥22.7b 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. 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.

On top of that, Hansoh Pharmaceutical Group grew its EBIT by 76% over the last twelve months, and that growth will make it easier to handle its debt. 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 generated free cash flow amounting to a very robust 94% 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¥23.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥4.1b, being 94% of its EBIT. The bottom line is that we do not find Hansoh Pharmaceutical Group's debt levels at all concerning. 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. For instance, we've identified 1 warning sign for Hansoh Pharmaceutical Group that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.