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. Importantly, Hybio Pharmaceutical Co., Ltd. (SZSE:300199) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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 Hybio Pharmaceutical's Debt?

As you can see below, at the end of September 2024, Hybio Pharmaceutical had CN¥1.85b of debt, up from CN¥1.74b a year ago. Click the image for more detail. However, it also had CN¥137.8m in cash, and so its net debt is CN¥1.71b.

How Healthy Is Hybio Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Hybio Pharmaceutical had liabilities of CN¥1.29b due within 12 months, and liabilities of CN¥1.10b due beyond 12 months. On the other hand, it had cash of CN¥137.8m and CN¥111.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.14b.

Of course, Hybio Pharmaceutical has a market capitalization of CN¥11.8b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hybio Pharmaceutical will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Hybio Pharmaceutical made a loss at the EBIT level, and saw its revenue drop to CN¥405m, which is a fall of 30%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hybio Pharmaceutical's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥249m. 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. We would feel better if it turned its trailing twelve month loss of CN¥368m into a profit. So we do think this stock is quite risky. For riskier companies like Hybio Pharmaceutical I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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