Shenzhen Hepalink Pharmaceutical Group (SZSE:002399) Is Making Moderate Use Of 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.' 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?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shenzhen Hepalink Pharmaceutical Group

What Is Shenzhen Hepalink Pharmaceutical Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Hepalink Pharmaceutical Group had CN¥4.25b of debt in September 2024, down from CN¥5.82b, one year before. However, it also had CN¥3.08b in cash, and so its net debt is CN¥1.17b.

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

According to the last reported balance sheet, Shenzhen Hepalink Pharmaceutical Group had liabilities of CN¥4.34b due within 12 months, and liabilities of CN¥1.57b due beyond 12 months. Offsetting this, it had CN¥3.08b in cash and CN¥1.30b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.53b more than its cash and near-term receivables, combined.

Of course, Shenzhen Hepalink Pharmaceutical Group has a market capitalization of CN¥15.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Shenzhen Hepalink Pharmaceutical Group'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.

Over 12 months, Shenzhen Hepalink Pharmaceutical Group made a loss at the EBIT level, and saw its revenue drop to CN¥5.5b, which is a fall of 6.5%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Shenzhen Hepalink Pharmaceutical Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥94m. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥146m. So in short it's a really risky stock. 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. Case in point: We've spotted 1 warning sign for Shenzhen Hepalink Pharmaceutical Group you should be aware of.

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.