Zhejiang Hisoar Pharmaceutical (SZSE:002099) Has Debt But No Earnings; Should You Worry?

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 can see that Zhejiang Hisoar Pharmaceutical Co., Ltd. (SZSE:002099) does use debt in its business. 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.

View our latest analysis for Zhejiang Hisoar Pharmaceutical

What Is Zhejiang Hisoar Pharmaceutical's Debt?

As you can see below, Zhejiang Hisoar Pharmaceutical had CN¥1.33b of debt at March 2024, down from CN¥1.53b a year prior. However, its balance sheet shows it holds CN¥1.60b in cash, so it actually has CN¥266.9m net cash.

How Strong Is Zhejiang Hisoar Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Zhejiang Hisoar Pharmaceutical had liabilities of CN¥1.90b due within 12 months, and liabilities of CN¥216.9m due beyond 12 months. On the other hand, it had cash of CN¥1.60b and CN¥514.7m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Zhejiang Hisoar Pharmaceutical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥9.47b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Zhejiang Hisoar Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhejiang Hisoar Pharmaceutical's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Zhejiang Hisoar Pharmaceutical had a loss before interest and tax, and actually shrunk its revenue by 18%, to CN¥2.1b. That's not what we would hope to see.

So How Risky Is Zhejiang Hisoar Pharmaceutical?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Zhejiang Hisoar Pharmaceutical had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥33m and booked a CN¥430m accounting loss. Given it only has net cash of CN¥266.9m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 1 warning sign with Zhejiang Hisoar Pharmaceutical , and understanding them should be part of your investment process.

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.