Lionco Pharmaceutical GroupLtd (SHSE:603669) Has Debt But No Earnings; Should You Worry?

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. We note that Lionco Pharmaceutical Group Co.,Ltd. (SHSE:603669) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Lionco Pharmaceutical GroupLtd

What Is Lionco Pharmaceutical GroupLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Lionco Pharmaceutical GroupLtd had CN¥474.0m of debt in June 2024, down from CN¥645.5m, one year before. But it also has CN¥579.1m in cash to offset that, meaning it has CN¥105.0m net cash.

How Healthy Is Lionco Pharmaceutical GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Lionco Pharmaceutical GroupLtd had liabilities of CN¥95.8m falling due within a year, and liabilities of CN¥463.3m due beyond that. Offsetting this, it had CN¥579.1m in cash and CN¥86.5m in receivables that were due within 12 months. So it actually has CN¥106.5m more liquid assets than total liabilities.

This surplus suggests that Lionco Pharmaceutical GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Lionco Pharmaceutical GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lionco Pharmaceutical GroupLtd'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.

Over 12 months, Lionco Pharmaceutical GroupLtd reported revenue of CN¥225m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Lionco Pharmaceutical GroupLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Lionco Pharmaceutical GroupLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥65m of cash and made a loss of CN¥122m. But the saving grace is the CN¥105.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Lionco Pharmaceutical GroupLtd you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.