The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Livzon Pharmaceutical Group Inc. (SZSE:000513) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Livzon Pharmaceutical Group
What Is Livzon Pharmaceutical Group's Debt?
The image below, which you can click on for greater detail, shows that at June 2022 Livzon Pharmaceutical Group had debt of CN¥3.27b, up from CN¥2.40b in one year. However, it does have CN¥9.33b in cash offsetting this, leading to net cash of CN¥6.06b.SZSE:000513 Debt to Equity History September 19th 2022
How Strong Is Livzon Pharmaceutical Group's Balance Sheet ?
The latest balance sheet data shows that Livzon Pharmaceutical Group had liabilities of CN¥6.75b due within a year, and liabilities of CN¥2.20b falling due after that. Offsetting these obligations, it had cash of CN¥9.33b as well as receivables valued at CN¥3.60b due within 12 months. So it can boast CN¥3.98b more liquid assets than total liabilities.
It's good to see that Livzon Pharmaceutical Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Livzon Pharmaceutical Group boasts net cash, so it's fair to say it does not have a heavy debt load!
While Livzon Pharmaceutical Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Livzon 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Livzon Pharmaceutical Group 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 most recent three years, Livzon Pharmaceutical Group recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case Livzon Pharmaceutical Group has CN¥6.06b in net cash and a decent-looking balance sheet. So is Livzon Pharmaceutical Group's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Livzon Pharmaceutical Group , and understanding them should be part of your investment process.
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.