These 4 Measures Indicate That Hua Hong Semiconductor (HKG:1347) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Hua Hong Semiconductor Limited (HKG:1347) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hua Hong Semiconductor

What Is Hua Hong Semiconductor's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Hua Hong Semiconductor had debt of US$2.10b, up from US$1.91b in one year. But on the other hand it also has US$5.59b in cash, leading to a US$3.49b net cash position.

How Healthy Is Hua Hong Semiconductor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hua Hong Semiconductor had liabilities of US$970.4m due within 12 months and liabilities of US$1.96b due beyond that. On the other hand, it had cash of US$5.59b and US$289.9m worth of receivables due within a year. So it actually has US$2.95b more liquid assets than total liabilities.

This surplus liquidity suggests that Hua Hong Semiconductor's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Hua Hong Semiconductor boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Hua Hong Semiconductor's EBIT was down 73% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hua Hong Semiconductor'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. Hua Hong Semiconductor 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, Hua Hong Semiconductor burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hua Hong Semiconductor has net cash of US$3.49b, as well as more liquid assets than liabilities. So we don't have any problem with Hua Hong Semiconductor's use of debt. 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. Be aware that Hua Hong Semiconductor is showing 2 warning signs in our investment analysis , you should know about...

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.