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. We note that Zhejiang Hisoar Pharmaceutical Co., Ltd. (SZSE:002099) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Zhejiang Hisoar Pharmaceutical
How Much Debt Does Zhejiang Hisoar Pharmaceutical Carry?
The image below, which you can click on for greater detail, shows that at September 2023 Zhejiang Hisoar Pharmaceutical had debt of CN¥1.35b, up from CN¥983.9m in one year. But on the other hand it also has CN¥1.93b in cash, leading to a CN¥575.8m net cash position.
A Look At Zhejiang Hisoar Pharmaceutical's Liabilities
We can see from the most recent balance sheet that Zhejiang Hisoar Pharmaceutical had liabilities of CN¥2.32b falling due within a year, and liabilities of CN¥187.3m due beyond that. Offsetting this, it had CN¥1.93b in cash and CN¥469.5m in receivables that were due within 12 months. So its liabilities total CN¥115.5m more than the combination of its cash and short-term receivables.
Having regard to Zhejiang Hisoar Pharmaceutical's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥8.24b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Zhejiang Hisoar Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhejiang Hisoar Pharmaceutical's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Zhejiang Hisoar Pharmaceutical had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥2.3b. We would much prefer see growth.
So How Risky Is Zhejiang Hisoar Pharmaceutical?
Although Zhejiang Hisoar Pharmaceutical had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥97m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Zhejiang Hisoar Pharmaceutical (1 is a bit unpleasant) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.