Aurisco PharmaceuticalLtd (SHSE:605116) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Aurisco Pharmaceutical Co.,Ltd. (SHSE:605116) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Aurisco PharmaceuticalLtd

How Much Debt Does Aurisco PharmaceuticalLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Aurisco PharmaceuticalLtd had CN¥135.5m of debt, an increase on CN¥39.5m, over one year. But it also has CN¥533.6m in cash to offset that, meaning it has CN¥398.1m net cash.

How Healthy Is Aurisco PharmaceuticalLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aurisco PharmaceuticalLtd had liabilities of CN¥489.0m due within 12 months and liabilities of CN¥140.8m due beyond that. Offsetting these obligations, it had cash of CN¥533.6m as well as receivables valued at CN¥292.7m due within 12 months. So it actually has CN¥196.5m more liquid assets than total liabilities.

This surplus suggests that Aurisco PharmaceuticalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Aurisco PharmaceuticalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Aurisco PharmaceuticalLtd has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Aurisco PharmaceuticalLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Aurisco PharmaceuticalLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Aurisco PharmaceuticalLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Aurisco PharmaceuticalLtd has CN¥398.1m in net cash and a decent-looking balance sheet. And we liked the look of last year's 40% year-on-year EBIT growth. So we don't have any problem with Aurisco PharmaceuticalLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Aurisco PharmaceuticalLtd (including 1 which is significant) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.