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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Shenzhen Hepalink Pharmaceutical Group Co., Ltd. (SZSE:002399) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Shenzhen Hepalink Pharmaceutical Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Shenzhen Hepalink Pharmaceutical Group had CN¥5.43b of debt in December 2023, down from CN¥6.32b, one year before. However, because it has a cash reserve of CN¥2.27b, its net debt is less, at about CN¥3.17b.
A Look At Shenzhen Hepalink Pharmaceutical Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Shenzhen Hepalink Pharmaceutical Group had liabilities of CN¥4.99b due within 12 months and liabilities of CN¥2.23b due beyond that. On the other hand, it had cash of CN¥2.27b and CN¥1.27b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.67b.
This deficit isn't so bad because Shenzhen Hepalink Pharmaceutical Group is worth CN¥11.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Shenzhen Hepalink 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.
Over 12 months, Shenzhen Hepalink Pharmaceutical Group made a loss at the EBIT level, and saw its revenue drop to CN¥5.4b, which is a fall of 24%. That makes us nervous, to say the least.
Caveat Emptor
Not only did Shenzhen Hepalink Pharmaceutical Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥29m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥1.3b in negative free cash flow over the last twelve months. 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. Case in point: We've spotted 1 warning sign for Shenzhen Hepalink Pharmaceutical Group 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.