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.' 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. Importantly, Jiangsu Aidea Pharmaceutical Co., Ltd. (SHSE:688488) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Jiangsu Aidea Pharmaceutical
What Is Jiangsu Aidea Pharmaceutical's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Jiangsu Aidea Pharmaceutical had CN¥398.3m of debt, an increase on CN¥160.1m, over one year. But it also has CN¥517.0m in cash to offset that, meaning it has CN¥118.7m net cash.
A Look At Jiangsu Aidea Pharmaceutical's Liabilities
According to the last reported balance sheet, Jiangsu Aidea Pharmaceutical had liabilities of CN¥490.0m due within 12 months, and liabilities of CN¥130.2m due beyond 12 months. On the other hand, it had cash of CN¥517.0m and CN¥190.0m worth of receivables due within a year. So it can boast CN¥86.8m more liquid assets than total liabilities.
Having regard to Jiangsu Aidea 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¥5.42b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Jiangsu Aidea 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 you can't view debt in total isolation; since Jiangsu Aidea Pharmaceutical will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Jiangsu Aidea Pharmaceutical reported revenue of CN¥412m, which is a gain of 128%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Jiangsu Aidea Pharmaceutical?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Jiangsu Aidea Pharmaceutical had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥203m of cash and made a loss of CN¥80m. However, it has net cash of CN¥118.7m, so it has a bit of time before it will need more capital. The good news for shareholders is that Jiangsu Aidea Pharmaceutical has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 Jiangsu Aidea Pharmaceutical you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
