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. As with many other companies Hinova Pharmaceuticals Inc. (SHSE:688302) makes use of debt. But should shareholders be worried about its use of debt?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hinova Pharmaceuticals

What Is Hinova Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Hinova Pharmaceuticals had CN¥30.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥1.21b in cash, so it actually has CN¥1.18b net cash.

How Strong Is Hinova Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hinova Pharmaceuticals had liabilities of CN¥153.9m due within 12 months and liabilities of CN¥17.7m due beyond that. Offsetting this, it had CN¥1.21b in cash and CN¥1.44m in receivables that were due within 12 months. So it can boast CN¥1.04b more liquid assets than total liabilities.

It's good to see that Hinova Pharmaceuticals has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Hinova Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hinova Pharmaceuticals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

While it hasn't made a profit, at least Hinova Pharmaceuticals booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Hinova Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Hinova Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥435m of cash and made a loss of CN¥317m. But the saving grace is the CN¥1.18b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Hinova Pharmaceuticals (of which 1 is a bit unpleasant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.