Is Xiangxue PharmaceuticalLtd (SZSE:300147) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Xiangxue Pharmaceutical Co.,Ltd. (SZSE:300147) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Xiangxue PharmaceuticalLtd

What Is Xiangxue PharmaceuticalLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Xiangxue PharmaceuticalLtd had CN¥2.30b of debt in September 2024, down from CN¥2.44b, one year before. On the flip side, it has CN¥75.6m in cash leading to net debt of about CN¥2.22b.

How Healthy Is Xiangxue PharmaceuticalLtd's Balance Sheet?

The latest balance sheet data shows that Xiangxue PharmaceuticalLtd had liabilities of CN¥5.16b due within a year, and liabilities of CN¥780.9m falling due after that. On the other hand, it had cash of CN¥75.6m and CN¥956.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.91b.

This is a mountain of leverage relative to its market capitalization of CN¥7.95b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Xiangxue PharmaceuticalLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Xiangxue PharmaceuticalLtd had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to CN¥2.1b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Xiangxue PharmaceuticalLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥87m. 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¥7.4m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. To that end, you should be aware of the 3 warning signs we've spotted with Xiangxue PharmaceuticalLtd .

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.

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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.