Is ChemPartner PharmaTechLtd (SZSE:300149) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, ChemPartner PharmaTech Co.,Ltd. (SZSE:300149) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for ChemPartner PharmaTechLtd

What Is ChemPartner PharmaTechLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ChemPartner PharmaTechLtd had CN¥136.0m of debt in September 2024, down from CN¥177.3m, one year before. But it also has CN¥321.8m in cash to offset that, meaning it has CN¥185.7m net cash.

How Healthy Is ChemPartner PharmaTechLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ChemPartner PharmaTechLtd had liabilities of CN¥347.2m due within 12 months and liabilities of CN¥419.8m due beyond that. Offsetting these obligations, it had cash of CN¥321.8m as well as receivables valued at CN¥228.3m due within 12 months. So it has liabilities totalling CN¥216.9m more than its cash and near-term receivables, combined.

Given ChemPartner PharmaTechLtd has a market capitalization of CN¥4.22b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, ChemPartner PharmaTechLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is ChemPartner PharmaTechLtd'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, ChemPartner PharmaTechLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.0b, which is a fall of 11%. That's not what we would hope to see.

So How Risky Is ChemPartner PharmaTechLtd?

Although ChemPartner PharmaTechLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥96m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 2 warning signs for ChemPartner PharmaTechLtd 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.