We Think Apeloa PharmaceuticalLtd (SZSE:000739) Can Stay On Top Of Its Debt

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.' 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 can see that Apeloa Pharmaceutical Co.,Ltd (SZSE:000739) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Apeloa PharmaceuticalLtd

What Is Apeloa PharmaceuticalLtd's Net Debt?

As you can see below, at the end of September 2024, Apeloa PharmaceuticalLtd had CN¥939.9m of debt, up from CN¥886.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥3.89b in cash, leading to a CN¥2.95b net cash position.

How Strong Is Apeloa PharmaceuticalLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Apeloa PharmaceuticalLtd had liabilities of CN¥6.48b due within 12 months and liabilities of CN¥274.9m due beyond that. Offsetting these obligations, it had cash of CN¥3.89b as well as receivables valued at CN¥2.40b due within 12 months. So its liabilities total CN¥459.6m more than the combination of its cash and short-term receivables.

Given Apeloa PharmaceuticalLtd has a market capitalization of CN¥17.4b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

But the other side of the story is that Apeloa PharmaceuticalLtd saw its EBIT decline by 2.9% over the last year. 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 ultimately the future profitability of the business will decide if Apeloa PharmaceuticalLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 59% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Apeloa PharmaceuticalLtd has CN¥2.95b in net cash. So we don't have any problem with Apeloa PharmaceuticalLtd's use of debt. 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. Be aware that Apeloa PharmaceuticalLtd is showing 1 warning sign in our investment analysis , you should know about...

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.