Jiangsu Aidea Pharmaceutical (SHSE:688488) Is Making Moderate Use Of Debt

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.' 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 Jiangsu Aidea Pharmaceutical Co., Ltd. (SHSE:688488) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jiangsu Aidea Pharmaceutical

What Is Jiangsu Aidea Pharmaceutical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jiangsu Aidea Pharmaceutical had CN¥449.0m of debt, an increase on CN¥228.6m, over one year. On the flip side, it has CN¥402.3m in cash leading to net debt of about CN¥46.7m.

How Strong Is Jiangsu Aidea Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Jiangsu Aidea Pharmaceutical had liabilities of CN¥569.1m due within 12 months, and liabilities of CN¥69.6m due beyond 12 months. On the other hand, it had cash of CN¥402.3m and CN¥247.7m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Jiangsu Aidea Pharmaceutical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥5.64b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Jiangsu Aidea Pharmaceutical has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiangsu Aidea 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.

In the last year Jiangsu Aidea Pharmaceutical wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to CN¥392m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Jiangsu Aidea Pharmaceutical's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥120m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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 - Jiangsu Aidea Pharmaceutical has 1 warning sign we think you should be aware of.

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.