Does Porton Pharma Solutions (SZSE:300363) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Porton Pharma Solutions Ltd. (SZSE:300363) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Porton Pharma Solutions

How Much Debt Does Porton Pharma Solutions Carry?

As you can see below, at the end of September 2023, Porton Pharma Solutions had CN¥942.1m of debt, up from CN¥846.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥2.12b in cash, so it actually has CN¥1.18b net cash.

How Healthy Is Porton Pharma Solutions' Balance Sheet?

We can see from the most recent balance sheet that Porton Pharma Solutions had liabilities of CN¥1.53b falling due within a year, and liabilities of CN¥1.30b due beyond that. On the other hand, it had cash of CN¥2.12b and CN¥778.7m worth of receivables due within a year. So it can boast CN¥69.5m more liquid assets than total liabilities.

This state of affairs indicates that Porton Pharma Solutions' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥10.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Porton Pharma Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Porton Pharma Solutions if management cannot prevent a repeat of the 52% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Porton Pharma Solutions's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Porton Pharma Solutions has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Porton Pharma Solutions's free cash flow amounted to 36% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Porton Pharma Solutions has CN¥1.18b in net cash and a decent-looking balance sheet. So we are not troubled with Porton Pharma Solutions's debt use. 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. Case in point: We've spotted 4 warning signs for Porton Pharma Solutions you should be aware of, and 2 of them are a bit concerning.

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.