Hinova Pharmaceuticals (SHSE:688302) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Hinova Pharmaceuticals Inc. (SHSE:688302) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Hinova Pharmaceuticals

What Is Hinova Pharmaceuticals's Debt?

As you can see below, at the end of September 2023, Hinova Pharmaceuticals had CN¥43.7m of debt, up from CN¥30.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.21b in cash, leading to a CN¥1.17b net cash position.

How Strong Is Hinova Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Hinova Pharmaceuticals had liabilities of CN¥153.9m due within a year, and liabilities of CN¥17.7m falling due after that. On the other hand, it had cash of CN¥1.21b and CN¥1.44m worth of receivables due within a year. So it actually has CN¥1.04b more liquid assets than total liabilities.

This surplus suggests that Hinova Pharmaceuticals is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Hinova Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hinova Pharmaceuticals'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.

It seems likely shareholders hope that Hinova Pharmaceuticals can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Hinova Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Hinova Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥435m of cash and made a loss of CN¥294m. But the saving grace is the CN¥1.17b on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 Hinova Pharmaceuticals (including 1 which can't be ignored) .

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.