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. Importantly, Kintor Pharmaceutical Limited (HKG:9939) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company’s use of debt, we first look at cash and debt together.
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What Is Kintor Pharmaceutical’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 Kintor Pharmaceutical had CN¥314.9m of debt, an increase on CN¥221.7m, over one year. However, its balance sheet shows it holds CN¥701.9m in cash, so it actually has CN¥387.0m net cash.
How Healthy Is Kintor Pharmaceutical’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Kintor Pharmaceutical had liabilities of CN¥273.9m due within 12 months and liabilities of CN¥274.7m due beyond that. Offsetting this, it had CN¥701.9m in cash and CN¥27.8m in receivables that were due within 12 months. So it can boast CN¥181.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Kintor Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kintor Pharmaceutical boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Kintor Pharmaceutical’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Since Kintor Pharmaceutical doesn’t have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.
So How Risky Is Kintor Pharmaceutical?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Kintor Pharmaceutical lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥484m and booked a CN¥648m accounting loss. Given it only has net cash of CN¥387.0m, the company may need to raise more capital if it doesn’t reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. 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 5 warning signs for Kintor Pharmaceutical you should be aware of, and 2 of them can’t be ignored.
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.