Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Luoxin Pharmaceuticals Group Stock Co., Ltd. (SZSE:002793) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Luoxin Pharmaceuticals Group Stock's Debt?
As you can see below, Luoxin Pharmaceuticals Group Stock had CN¥1.79b of debt at September 2023, down from CN¥3.45b a year prior. On the flip side, it has CN¥971.0m in cash leading to net debt of about CN¥820.6m.
How Healthy Is Luoxin Pharmaceuticals Group Stock's Balance Sheet?
The latest balance sheet data shows that Luoxin Pharmaceuticals Group Stock had liabilities of CN¥2.04b due within a year, and liabilities of CN¥755.8m falling due after that. On the other hand, it had cash of CN¥971.0m and CN¥821.4m worth of receivables due within a year. So it has liabilities totalling CN¥1.01b more than its cash and near-term receivables, combined.
Luoxin Pharmaceuticals Group Stock has a market capitalization of CN¥4.77b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Luoxin Pharmaceuticals Group Stock'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.
Over 12 months, Luoxin Pharmaceuticals Group Stock made a loss at the EBIT level, and saw its revenue drop to CN¥1.6b, which is a fall of 68%. That makes us nervous, to say the least.
Caveat Emptor
Not only did Luoxin Pharmaceuticals Group Stock's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥1.3b. 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. For example, we would not want to see a repeat of last year's loss of CN¥958m. So in short it's a really risky stock. 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. For example, we've discovered 1 warning sign for Luoxin Pharmaceuticals Group Stock that you should be aware of before investing here.
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.