Is Porton Pharma Solutions (SZSE:300363) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that Porton Pharma Solutions Ltd. (SZSE:300363) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Porton Pharma Solutions

What Is Porton Pharma Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Porton Pharma Solutions had CN¥1.37b of debt, an increase on CN¥942.1m, over one year. However, it does have CN¥1.40b in cash offsetting this, leading to net cash of CN¥32.3m.

How Strong Is Porton Pharma Solutions' Balance Sheet?

The latest balance sheet data shows that Porton Pharma Solutions had liabilities of CN¥1.51b due within a year, and liabilities of CN¥1.86b falling due after that. Offsetting this, it had CN¥1.40b in cash and CN¥822.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.14b more than its cash and near-term receivables, combined.

Since publicly traded Porton Pharma Solutions shares are worth a total of CN¥8.60b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Porton Pharma Solutions boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Porton Pharma Solutions made a loss at the EBIT level, and saw its revenue drop to CN¥2.8b, which is a fall of 43%. To be frank that doesn't bode well.

So How Risky Is Porton Pharma Solutions?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Porton Pharma Solutions lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥705m and booked a CN¥391m accounting loss. Given it only has net cash of CN¥32.3m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Porton Pharma Solutions (of which 1 is a bit concerning!) you should know about.

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.