Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Zhejiang Hisoar Pharmaceutical Co., Ltd. (SZSE:002099) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.
What Is Zhejiang Hisoar Pharmaceutical's Debt?
The image below, which you can click on for greater detail, shows that Zhejiang Hisoar Pharmaceutical had debt of CN¥1.33b at the end of March 2024, a reduction from CN¥1.53b over a year. But on the other hand it also has CN¥1.60b in cash, leading to a CN¥266.9m net cash position.
How Strong Is Zhejiang Hisoar Pharmaceutical's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Zhejiang Hisoar Pharmaceutical had liabilities of CN¥1.90b due within 12 months and liabilities of CN¥216.9m due beyond that. On the other hand, it had cash of CN¥1.60b and CN¥514.7m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
Having regard to Zhejiang Hisoar Pharmaceutical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥9.57b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Zhejiang Hisoar Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zhejiang Hisoar 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, Zhejiang Hisoar Pharmaceutical made a loss at the EBIT level, and saw its revenue drop to CN¥2.1b, which is a fall of 18%. We would much prefer see growth.
So How Risky Is Zhejiang Hisoar Pharmaceutical?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Zhejiang Hisoar Pharmaceutical had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥33m of cash and made a loss of CN¥430m. Given it only has net cash of CN¥266.9m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Zhejiang Hisoar Pharmaceutical that you should be aware of before investing here.
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.