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 HitGen Inc. (SHSE:688222) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does HitGen Carry?

As you can see below, HitGen had CN¥208.3m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥983.8m in cash to offset that, meaning it has CN¥775.4m net cash.

How Strong Is HitGen's Balance Sheet?

The latest balance sheet data shows that HitGen had liabilities of CN¥80.2m due within a year, and liabilities of CN¥260.1m falling due after that. On the other hand, it had cash of CN¥983.8m and CN¥86.1m worth of receivables due within a year. So it can boast CN¥729.7m more liquid assets than total liabilities.

This surplus suggests that HitGen is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, HitGen boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, HitGen turned things around in the last 12 months, delivering and EBIT of CN¥49m. 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 HitGen's ability to maintain a healthy balance sheet going forward. 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. HitGen 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. Happily for any shareholders, HitGen actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HitGen has net cash of CN¥775.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 211% of that EBIT to free cash flow, bringing in CN¥103m. So we don't think HitGen's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in HitGen, you may well want to click here to check an interactive graph of its earnings per share history.

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.