Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that HitGen Inc. (SHSE:688222) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is HitGen's Debt?

The chart below, which you can click on for greater detail, shows that HitGen had CN¥207.0m in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥942.6m in cash, leading to a CN¥735.6m net cash position.

How Strong Is HitGen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HitGen had liabilities of CN¥69.3m due within 12 months and liabilities of CN¥251.5m due beyond that. Offsetting these obligations, it had cash of CN¥942.6m as well as receivables valued at CN¥92.8m due within 12 months. So it actually has CN¥714.6m more liquid assets than total liabilities.

This short term liquidity is a sign that HitGen could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, HitGen boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, HitGen grew its EBIT by 440% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HitGen 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While HitGen 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. Over the last two years, HitGen actually produced more free cash flow than EBIT. 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 it is always sensible to investigate a company's debt, in this case HitGen has CN¥735.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥101m, being 225% of its EBIT. So we don't think HitGen's use of debt is risky. 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. Be aware that HitGen is showing 1 warning sign in our investment analysis , you should know about...

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.