Is Hansoh Pharmaceutical Group (HKG:3692) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. 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.

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Hansoh Pharmaceutical Group's Debt?

As you can see below, Hansoh Pharmaceutical Group had CN¥40.9m of debt at December 2024, down from CN¥4.22b a year prior. But it also has CN¥23.4b in cash to offset that, meaning it has CN¥23.4b net cash.

A Look At Hansoh Pharmaceutical Group's Liabilities

The latest balance sheet data shows that Hansoh Pharmaceutical Group had liabilities of CN¥2.70b due within a year, and liabilities of CN¥282.7m falling due after that. Offsetting these obligations, it had cash of CN¥23.4b as well as receivables valued at CN¥3.26b due within 12 months. So it actually has CN¥23.7b more liquid assets than total liabilities.

This surplus suggests that Hansoh Pharmaceutical Group is using debt in a way that is appears to be both safe and conservative. 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.

View our latest analysis for Hansoh Pharmaceutical Group

On top of that, Hansoh Pharmaceutical Group grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 93% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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¥23.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥3.3b, being 93% of its EBIT. When it comes to Hansoh Pharmaceutical Group's debt, we sufficiently relaxed that our mind turns to the jacuzzi. We'd be very excited to see if Hansoh Pharmaceutical Group insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.