We Think Realcan Pharmaceutical Group (SZSE:002589) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Realcan Pharmaceutical Group Co., Ltd. (SZSE:002589) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Realcan Pharmaceutical Group

What Is Realcan Pharmaceutical Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Realcan Pharmaceutical Group had debt of CN¥7.06b, up from CN¥3.96b in one year. On the flip side, it has CN¥4.69b in cash leading to net debt of about CN¥2.37b.

How Healthy Is Realcan Pharmaceutical Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Realcan Pharmaceutical Group had liabilities of CN¥10.2b due within 12 months and liabilities of CN¥556.5m due beyond that. Offsetting these obligations, it had cash of CN¥4.69b as well as receivables valued at CN¥5.71b due within 12 months. So its liabilities total CN¥311.0m more than the combination of its cash and short-term receivables.

Given Realcan Pharmaceutical Group has a market capitalization of CN¥5.30b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Realcan Pharmaceutical Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Realcan Pharmaceutical Group wasn't profitable at an EBIT level, but managed to grow its revenue by 6.2%, to CN¥8.0b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Realcan Pharmaceutical Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥14m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥545m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 - Realcan Pharmaceutical Group has 2 warning signs we think you should be aware of.

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.