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 can see that Ascentage Pharma Group International (HKG:6855) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Ascentage Pharma Group International
What Is Ascentage Pharma Group International's Debt?
As you can see below, at the end of June 2023, Ascentage Pharma Group International had CN¥1.65b of debt, up from CN¥1.54b a year ago. Click the image for more detail. However, it does have CN¥1.58b in cash offsetting this, leading to net debt of about CN¥73.3m.
How Healthy Is Ascentage Pharma Group International's Balance Sheet?
According to the last reported balance sheet, Ascentage Pharma Group International had liabilities of CN¥642.9m due within 12 months, and liabilities of CN¥1.68b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.58b as well as receivables valued at CN¥81.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥654.7m.
Of course, Ascentage Pharma Group International has a market capitalization of CN¥6.86b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Ascentage Pharma Group International has a very light debt load indeed. 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 Ascentage Pharma Group International'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 Ascentage Pharma Group International wasn't profitable at an EBIT level, but managed to grow its revenue by 132%, to CN¥257m. So there's no doubt that shareholders are cheering for growth
Caveat Emptor
While we can certainly appreciate Ascentage Pharma Group International's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CN¥839m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥814m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ascentage Pharma Group International is showing 2 warning signs in our investment analysis , you should know about...
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.