Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Hua Hong Semiconductor Limited (HKG:1347) does use debt in its business. But should shareholders be worried about its use of debt?
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. 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 examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Hua Hong Semiconductor Carry?
The image below, which you can click on for greater detail, shows that at March 2024 Hua Hong Semiconductor had debt of US$2.23b, up from US$1.91b in one year. But on the other hand it also has US$6.11b in cash, leading to a US$3.88b net cash position.
A Look At Hua Hong Semiconductor's Liabilities
According to the last reported balance sheet, Hua Hong Semiconductor had liabilities of US$967.2m due within 12 months, and liabilities of US$2.01b due beyond 12 months. Offsetting these obligations, it had cash of US$6.11b as well as receivables valued at US$321.8m due within 12 months. So it actually has US$3.45b more liquid assets than total liabilities.
This surplus strongly suggests that Hua Hong Semiconductor has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Hua Hong Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Hua Hong Semiconductor had a loss before interest and tax, and actually shrunk its revenue by 16%, to US$2.1b. We would much prefer see growth.
So How Risky Is Hua Hong Semiconductor?
While Hua Hong Semiconductor lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$160m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Hua Hong Semiconductor is showing 2 warning signs in our investment analysis , you should know about...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com