Apeloa PharmaceuticalLtd (SZSE:000739) Seems To Use Debt Quite Sensibly

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Apeloa Pharmaceutical Co.,Ltd (SZSE:000739) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Apeloa PharmaceuticalLtd

What Is Apeloa PharmaceuticalLtd's Debt?

As you can see below, Apeloa PharmaceuticalLtd had CN¥971.7m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥3.95b in cash, leading to a CN¥2.98b net cash position.

How Strong Is Apeloa PharmaceuticalLtd's Balance Sheet?

We can see from the most recent balance sheet that Apeloa PharmaceuticalLtd had liabilities of CN¥6.96b falling due within a year, and liabilities of CN¥210.2m due beyond that. Offsetting this, it had CN¥3.95b in cash and CN¥2.86b in receivables that were due within 12 months. So its liabilities total CN¥367.6m more than the combination of its cash and short-term receivables.

Of course, Apeloa PharmaceuticalLtd has a market capitalization of CN¥18.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Apeloa PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Apeloa PharmaceuticalLtd grew its EBIT by 2.1% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Apeloa PharmaceuticalLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Apeloa 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. During the last three years, Apeloa PharmaceuticalLtd produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Apeloa PharmaceuticalLtd has CN¥2.98b in net cash. So we don't think Apeloa PharmaceuticalLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Apeloa PharmaceuticalLtd that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.