Xiangxue PharmaceuticalLtd (SZSE:300147) 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 note that Xiangxue Pharmaceutical Co.,Ltd. (SZSE:300147) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Xiangxue PharmaceuticalLtd

How Much Debt Does Xiangxue PharmaceuticalLtd Carry?

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. However, because it has a cash reserve of CN¥75.6m, its net debt is less, at about CN¥2.22b.

How Strong 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 it has liabilities totalling CN¥4.91b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥6.28b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Xiangxue PharmaceuticalLtd 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 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

Importantly, Xiangxue PharmaceuticalLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥87m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥7.4m of cash over the last year. 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 Xiangxue PharmaceuticalLtd is showing 3 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.