David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Shanghai MicuRx Pharmaceutical Co., Ltd. (SHSE:688373) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Shanghai MicuRx Pharmaceutical's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shanghai MicuRx Pharmaceutical had CN¥228.5m of debt, an increase on CN¥128.9m, over one year. But on the other hand it also has CN¥1.06b in cash, leading to a CN¥835.7m net cash position.
How Healthy Is Shanghai MicuRx Pharmaceutical's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Shanghai MicuRx Pharmaceutical had liabilities of CN¥66.2m due within 12 months and liabilities of CN¥207.2m due beyond that. Offsetting this, it had CN¥1.06b in cash and CN¥20.1m in receivables that were due within 12 months. So it actually has CN¥810.9m more liquid assets than total liabilities.
This excess liquidity suggests that Shanghai MicuRx Pharmaceutical is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Shanghai MicuRx Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shanghai MicuRx Pharmaceutical'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.
Over 12 months, Shanghai MicuRx Pharmaceutical reported revenue of CN¥91m, which is a gain of 88%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Shanghai MicuRx Pharmaceutical?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Shanghai MicuRx Pharmaceutical had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥295m of cash and made a loss of CN¥418m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥835.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Shanghai MicuRx Pharmaceutical's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shanghai MicuRx Pharmaceutical (of which 1 is potentially serious!) 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.