Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Jiangsu Aidea Pharmaceutical Co., Ltd. (SHSE:688488) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Jiangsu Aidea Pharmaceutical Carry?
As you can see below, at the end of March 2024, Jiangsu Aidea Pharmaceutical had CN¥449.0m of debt, up from CN¥228.6m a year ago. Click the image for more detail. On the flip side, it has CN¥402.3m in cash leading to net debt of about CN¥46.7m.
A Look At Jiangsu Aidea Pharmaceutical's Liabilities
Zooming in on the latest balance sheet data, we can see that Jiangsu Aidea Pharmaceutical had liabilities of CN¥569.1m due within 12 months and liabilities of CN¥69.6m due beyond that. Offsetting this, it had CN¥402.3m in cash and CN¥247.7m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Jiangsu Aidea Pharmaceutical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥5.64b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Jiangsu Aidea Pharmaceutical has virtually no net debt, 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 it is future earnings, more than anything, that will determine Jiangsu Aidea Pharmaceutical's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Jiangsu Aidea Pharmaceutical wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to CN¥392m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
While we can certainly appreciate Jiangsu Aidea Pharmaceutical's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at CN¥120m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. For example, we've discovered 1 warning sign for Jiangsu Aidea Pharmaceutical that you should be aware of before investing here.
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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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.
