Luoxin Pharmaceuticals Group Stock (SZSE:002793) Is Making Moderate Use Of Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Luoxin Pharmaceuticals Group Stock Co., Ltd. (SZSE:002793) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Luoxin Pharmaceuticals Group Stock

How Much Debt Does Luoxin Pharmaceuticals Group Stock Carry?

As you can see below, Luoxin Pharmaceuticals Group Stock had CN¥1.70b of debt at March 2024, down from CN¥2.68b a year prior. However, it also had CN¥726.0m in cash, and so its net debt is CN¥976.5m.

How Healthy Is Luoxin Pharmaceuticals Group Stock's Balance Sheet?

According to the last reported balance sheet, Luoxin Pharmaceuticals Group Stock had liabilities of CN¥2.25b due within 12 months, and liabilities of CN¥445.5m due beyond 12 months. On the other hand, it had cash of CN¥726.0m and CN¥758.0m worth of receivables due within a year. So it has liabilities totalling CN¥1.21b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Luoxin Pharmaceuticals Group Stock is worth CN¥3.89b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Luoxin Pharmaceuticals Group Stock'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.

Over 12 months, Luoxin Pharmaceuticals Group Stock reported revenue of CN¥2.4b, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Luoxin Pharmaceuticals Group Stock produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥445m. 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. We would feel better if it turned its trailing twelve month loss of CN¥608m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Luoxin Pharmaceuticals Group Stock is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com