Would Hainan Shuangcheng Pharmaceuticals (SZSE:002693) Be Better Off With Less Debt?

Warren Buffett famously said, '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. As with many other companies Hainan Shuangcheng Pharmaceuticals Co., Ltd. (SZSE:002693) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hainan Shuangcheng Pharmaceuticals

What Is Hainan Shuangcheng Pharmaceuticals's Debt?

As you can see below, at the end of September 2024, Hainan Shuangcheng Pharmaceuticals had CN¥209.2m of debt, up from CN¥166.0m a year ago. Click the image for more detail. However, it does have CN¥50.3m in cash offsetting this, leading to net debt of about CN¥159.0m.

How Strong Is Hainan Shuangcheng Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Hainan Shuangcheng Pharmaceuticals had liabilities of CN¥159.9m due within a year, and liabilities of CN¥198.4m falling due after that. Offsetting this, it had CN¥50.3m in cash and CN¥24.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥283.2m.

Of course, Hainan Shuangcheng Pharmaceuticals has a market capitalization of CN¥5.86b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hainan Shuangcheng Pharmaceuticals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥36m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 Hainan Shuangcheng Pharmaceuticals is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.