Is Hainan Shuangcheng Pharmaceuticals (SZSE:002693) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Hainan Shuangcheng Pharmaceuticals Co., Ltd. (SZSE:002693) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hainan Shuangcheng Pharmaceuticals

What Is Hainan Shuangcheng Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hainan Shuangcheng Pharmaceuticals had CN¥209.2m of debt, an increase on CN¥166.0m, over one year. However, because it has a cash reserve of CN¥50.3m, its net debt is less, at about CN¥159.0m.

A Look At Hainan Shuangcheng Pharmaceuticals' Liabilities

According to the last reported balance sheet, Hainan Shuangcheng Pharmaceuticals had liabilities of CN¥159.9m due within 12 months, and liabilities of CN¥198.4m due beyond 12 months. Offsetting this, it had CN¥50.3m in cash and CN¥24.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥283.2m more than its cash and near-term receivables, combined.

Given Hainan Shuangcheng Pharmaceuticals has a market capitalization of CN¥9.95b, it's hard to believe these liabilities pose much threat. 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 you can't view debt in total isolation; since Hainan Shuangcheng Pharmaceuticals will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Hainan Shuangcheng Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 30%, to CN¥181m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Hainan Shuangcheng Pharmaceuticals's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥68m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥36m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Hainan Shuangcheng Pharmaceuticals that you should be aware of before investing here.

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.