Here's Why Shenzhen Hepalink Pharmaceutical Group (SZSE:002399) Can Afford Some Debt

Warren Buffett famously said, '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 can see that Shenzhen Hepalink Pharmaceutical Group Co., Ltd. (SZSE:002399) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for Shenzhen Hepalink Pharmaceutical Group

What Is Shenzhen Hepalink Pharmaceutical Group's Net Debt?

As you can see below, Shenzhen Hepalink Pharmaceutical Group had CN¥4.86b of debt at March 2024, down from CN¥6.22b a year prior. However, because it has a cash reserve of CN¥2.50b, its net debt is less, at about CN¥2.35b.

How Strong Is Shenzhen Hepalink Pharmaceutical Group's Balance Sheet?

According to the last reported balance sheet, Shenzhen Hepalink Pharmaceutical Group had liabilities of CN¥4.61b due within 12 months, and liabilities of CN¥2.12b due beyond 12 months. On the other hand, it had cash of CN¥2.50b and CN¥1.26b worth of receivables due within a year. So its liabilities total CN¥2.98b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Shenzhen Hepalink Pharmaceutical Group is worth CN¥12.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Hepalink Pharmaceutical Group 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.

In the last year Shenzhen Hepalink Pharmaceutical Group had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥5.5b. That's not what we would hope to see.

Caveat Emptor

While Shenzhen Hepalink Pharmaceutical Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥134m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥695m. So in short it's a really risky stock. For riskier companies like Shenzhen Hepalink Pharmaceutical Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.