Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Grand Pharmaceutical Group Limited (HKG:512) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Grand Pharmaceutical Group's Net Debt?
The image below, which you can click on for greater detail, shows that Grand Pharmaceutical Group had debt of HK$3.33b at the end of December 2023, a reduction from HK$4.43b over a year. However, it also had HK$3.27b in cash, and so its net debt is HK$56.2m.
How Healthy Is Grand Pharmaceutical Group's Balance Sheet?
We can see from the most recent balance sheet that Grand Pharmaceutical Group had liabilities of HK$5.73b falling due within a year, and liabilities of HK$1.51b due beyond that. Offsetting this, it had HK$3.27b in cash and HK$2.32b in receivables that were due within 12 months. So it has liabilities totalling HK$1.65b more than its cash and near-term receivables, combined.
Since publicly traded Grand Pharmaceutical Group shares are worth a total of HK$16.6b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Grand Pharmaceutical Group has virtually no net debt, so it's fair to say it does not have a heavy debt load!
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Grand Pharmaceutical Group has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.019 and EBIT of 12.7 times the interest expense. So relative to past earnings, the debt load seems trivial. But the bad news is that Grand Pharmaceutical Group has seen its EBIT plunge 12% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Grand Pharmaceutical Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Grand Pharmaceutical Group recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Our View
Grand Pharmaceutical Group's interest cover was a real positive on this analysis, as was its net debt to EBITDA. On the other hand, its EBIT growth rate makes us a little less comfortable about its debt. Considering this range of data points, we think Grand Pharmaceutical Group is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. Be aware that Grand Pharmaceutical Group is showing 1 warning sign 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.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
レジェンダリーなファンドマネージャーであるLi Lu(Charlie Mungerに支持されている)はかつて、「最大の投資リスクは価格の変動ではなく、あなたが資本の永久的な損失を受けるかどうかです」と述べました。そのため、賢い投資家は、倒産に通常関連する債務が、企業がどの程度リスキーかを評価する際に非常に重要な要因であることを理解しています。同じく Grand Pharmaceutical Group Limited (HKG:512) も債務を利用していますが、この債務が株主にとって懸念すべき問題なのでしょうか?
Grand Pharmaceutical Groupの最新のバランスシートからわかるように、同社は1年以内に到期する負債が57.3億香港ドルあり、それ以降に到期する負債が15.1億香港ドルあります。その一方で、32.7億香港ドルの現金と、12ヵ月以内に支払われる2.32億香港ドルの未収入金があります。したがって、キャッシュと短期の未収入金を合わせた額を上回る1.65億香港ドルの負債を抱えています。
Grand Pharmaceutical Groupの上場株式の総額が166億香港ドルであることから、このレベルの負債が大きな脅威になることはなさそうです。ただし、バランスシートの強みを定期的に監視する価値はあると考えています。どちらにしても、Grand Pharmaceutical Groupは実質的に純債務がないため、負債に重荷を感じる必要はありません。
Grand Pharmaceutical Groupは非常に少額の債務(現金の純額)を抱えており、債務/EBITDA比率が0.019で、EBITの12.7倍の利子費用があります。過去の収益に対して債務負担が軽微であるように思われます。ただし、Grand Pharmaceutical Groupは過去12ヶ月間でEBITが12%減少したため、このようなパフォーマンスが頻繁に繰り返されると株式にとって困難になる可能性があります。債務については、バランスシートから多くのことを学ぶことができますが、ビジネスの将来の収益性が最終的にバランスシートを強化するかどうかを判断することが重要です。したがって、将来に焦点を当てる場合は、アナリストの利益予測を示す無料レポートをチェックすることができます。
Grand Pharmaceutical Groupの利息カバー率と純債務/EBITDAは、この分析上では非常にポジティブです。一方で、EBITの成長率については債務について少し不安を感じています。これらのデータポイントを考慮すると、Grand Pharmaceutical Groupは債務レベルを管理するための良い立場にあると考えられます。しかし、注意が必要です。投資リスクはすべてバランスシートにあるわけではないことに注意してください。私たちの投資分析では、 Grand Pharmaceutical Groupに 1つの警告サインが表示されていることに留意してください。