Porton Pharma Solutions (SZSE:300363) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Porton Pharma Solutions Ltd. (SZSE:300363) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Porton Pharma Solutions

What Is Porton Pharma Solutions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Porton Pharma Solutions had CN¥1.30b of debt, an increase on CN¥913.9m, over one year. But it also has CN¥1.48b in cash to offset that, meaning it has CN¥178.3m net cash.

A Look At Porton Pharma Solutions' Liabilities

Zooming in on the latest balance sheet data, we can see that Porton Pharma Solutions had liabilities of CN¥1.42b due within 12 months and liabilities of CN¥1.87b due beyond that. Offsetting these obligations, it had cash of CN¥1.48b as well as receivables valued at CN¥702.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.10b.

Of course, Porton Pharma Solutions has a market capitalization of CN¥6.63b, so these liabilities are probably manageable. 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! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Porton Pharma Solutions can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Porton Pharma Solutions had a loss before interest and tax, and actually shrunk its revenue by 51%, to CN¥2.7b. 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¥879m and booked a CN¥314m accounting loss. Given it only has net cash of CN¥178.3m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For instance, we've identified 1 warning sign for Porton Pharma Solutions that you should be aware of.

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.