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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Hutchison China MediTech Limited (LON:HCM) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Hutchison China MediTech
What Is Hutchison China MediTech's Debt?
As you can see below, Hutchison China MediTech had US$27.8m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has US$438.6m in cash to offset that, meaning it has US$410.7m net cash.
A Look At Hutchison China MediTech's Liabilities
According to the last reported balance sheet, Hutchison China MediTech had liabilities of US$158.4m due within 12 months, and liabilities of US$46.8m due beyond 12 months. Offsetting this, it had US$438.6m in cash and US$64.4m in receivables that were due within 12 months. So it actually has US$297.8m more liquid assets than total liabilities.
This surplus suggests that Hutchison China MediTech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hutchison China MediTech has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hutchison China MediTech'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.