Does Hybio Pharmaceutical (SZSE:300199) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Hybio Pharmaceutical Co., Ltd. (SZSE:300199) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Hybio Pharmaceutical

How Much Debt Does Hybio Pharmaceutical Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hybio Pharmaceutical had CN¥1.85b of debt, an increase on CN¥1.74b, over one year. On the flip side, it has CN¥137.8m in cash leading to net debt of about CN¥1.71b.

How Strong Is Hybio Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Hybio Pharmaceutical had liabilities of CN¥1.29b due within a year, and liabilities of CN¥1.10b falling due after that. Offsetting this, it had CN¥137.8m in cash and CN¥111.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥2.14b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Hybio Pharmaceutical has a market capitalization of CN¥9.96b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Hybio Pharmaceutical'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.

In the last year Hybio Pharmaceutical had a loss before interest and tax, and actually shrunk its revenue by 30%, to CN¥405m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hybio Pharmaceutical's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥249m. 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¥368m into a profit. So we do think this stock is quite risky. For riskier companies like Hybio Pharmaceutical I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.