Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Hua Hong Semiconductor Limited (HKG:1347) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Hua Hong Semiconductor
What Is Hua Hong Semiconductor's Net Debt?
As you can see below, at the end of September 2024, Hua Hong Semiconductor had US$2.25b of debt, up from US$1.93b a year ago. Click the image for more detail. However, its balance sheet shows it holds US$5.77b in cash, so it actually has US$3.52b net cash.
How Healthy Is Hua Hong Semiconductor's Balance Sheet?
The latest balance sheet data shows that Hua Hong Semiconductor had liabilities of US$1.85b due within a year, and liabilities of US$2.01b falling due after that. Offsetting these obligations, it had cash of US$5.77b as well as receivables valued at US$293.6m due within 12 months. So it actually has US$2.19b 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Hua Hong Semiconductor boasts net cash, so it's fair to say it does not have a heavy debt load! 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 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.
Over 12 months, Hua Hong Semiconductor made a loss at the EBIT level, and saw its revenue drop to US$1.9b, which is a fall of 22%. To be frank that doesn't bode well.
So How Risky Is Hua Hong Semiconductor?
Although Hua Hong Semiconductor had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$119m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Hua Hong Semiconductor (1 is a bit concerning) you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.