Is Apeloa PharmaceuticalLtd (SZSE:000739) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 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?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Apeloa PharmaceuticalLtd

What Is Apeloa PharmaceuticalLtd's Debt?

The chart below, which you can click on for greater detail, shows that Apeloa PharmaceuticalLtd had CN¥963.1m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds CN¥3.72b in cash, so it actually has CN¥2.75b net cash.

How Healthy Is Apeloa PharmaceuticalLtd's Balance Sheet?

The latest balance sheet data shows that Apeloa PharmaceuticalLtd had liabilities of CN¥6.77b due within a year, and liabilities of CN¥226.6m falling due after that. Offsetting these obligations, it had cash of CN¥3.72b as well as receivables valued at CN¥2.86b due within 12 months. So it has liabilities totalling CN¥424.3m more than its cash and near-term receivables, combined.

Of course, Apeloa PharmaceuticalLtd has a market capitalization of CN¥16.5b, 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. While it does have liabilities worth noting, Apeloa PharmaceuticalLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Apeloa PharmaceuticalLtd saw its EBIT drop by 2.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Apeloa PharmaceuticalLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Apeloa PharmaceuticalLtd recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Apeloa PharmaceuticalLtd has CN¥2.75b in net cash. So we are not troubled with Apeloa PharmaceuticalLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Apeloa PharmaceuticalLtd is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com