Is Harbin Medisan Pharmaceutical (SZSE:002900) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Harbin Medisan Pharmaceutical Co., Ltd. (SZSE:002900) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Harbin Medisan Pharmaceutical

What Is Harbin Medisan Pharmaceutical's Net Debt?

As you can see below, at the end of March 2024, Harbin Medisan Pharmaceutical had CN¥918.1m of debt, up from CN¥704.4m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.16b in cash, leading to a CN¥238.8m net cash position.

A Look At Harbin Medisan Pharmaceutical's Liabilities

According to the last reported balance sheet, Harbin Medisan Pharmaceutical had liabilities of CN¥1.15b due within 12 months, and liabilities of CN¥302.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.16b as well as receivables valued at CN¥84.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥212.0m.

Of course, Harbin Medisan Pharmaceutical has a market capitalization of CN¥3.75b, 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. Despite its noteworthy liabilities, Harbin Medisan 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 you can't view debt in total isolation; since Harbin Medisan Pharmaceutical 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.

Over 12 months, Harbin Medisan Pharmaceutical made a loss at the EBIT level, and saw its revenue drop to CN¥1.1b, which is a fall of 2.0%. That's not what we would hope to see.

So How Risky Is Harbin Medisan Pharmaceutical?

Although Harbin Medisan Pharmaceutical had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥53m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Harbin Medisan Pharmaceutical (3 are potentially serious!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.