Is Beijing Aosaikang Pharmaceutical (SZSE:002755) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Beijing Aosaikang Pharmaceutical Co., Ltd. (SZSE:002755) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Beijing Aosaikang Pharmaceutical

What Is Beijing Aosaikang Pharmaceutical's Net Debt?

As you can see below, at the end of March 2024, Beijing Aosaikang Pharmaceutical had CN¥87.6m of debt, up from CN¥45.0m a year ago. Click the image for more detail. But it also has CN¥1.89b in cash to offset that, meaning it has CN¥1.81b net cash.

How Healthy Is Beijing Aosaikang Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Beijing Aosaikang Pharmaceutical had liabilities of CN¥571.0m due within a year, and liabilities of CN¥79.8m falling due after that. Offsetting these obligations, it had cash of CN¥1.89b as well as receivables valued at CN¥227.0m due within 12 months. So it actually has CN¥1.47b more liquid assets than total liabilities.

This surplus suggests that Beijing Aosaikang Pharmaceutical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Beijing Aosaikang 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 Beijing Aosaikang Pharmaceutical's earnings that will influence how the balance sheet holds up in the future. 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 Beijing Aosaikang Pharmaceutical had a loss before interest and tax, and actually shrunk its revenue by 7.3%, to CN¥1.6b. That's not what we would hope to see.

So How Risky Is Beijing Aosaikang Pharmaceutical?

Although Beijing Aosaikang Pharmaceutical had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥122m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Beijing Aosaikang Pharmaceutical has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.