Is ApicHope Pharmaceutical Group (SZSE:300723) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 ApicHope Pharmaceutical Group Co., Ltd. (SZSE:300723) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ApicHope Pharmaceutical Group

What Is ApicHope Pharmaceutical Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 ApicHope Pharmaceutical Group had debt of CN¥1.70b, up from CN¥1.06b in one year. However, it also had CN¥664.2m in cash, and so its net debt is CN¥1.03b.

A Look At ApicHope Pharmaceutical Group's Liabilities

We can see from the most recent balance sheet that ApicHope Pharmaceutical Group had liabilities of CN¥1.46b falling due within a year, and liabilities of CN¥870.7m due beyond that. Offsetting this, it had CN¥664.2m in cash and CN¥407.0m in receivables that were due within 12 months. So its liabilities total CN¥1.26b more than the combination of its cash and short-term receivables.

Since publicly traded ApicHope Pharmaceutical Group shares are worth a total of CN¥7.52b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 ApicHope Pharmaceutical Group'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, ApicHope Pharmaceutical Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.9b, which is a fall of 25%. That makes us nervous, to say the least.

Caveat Emptor

While ApicHope Pharmaceutical Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥1.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥416m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example ApicHope Pharmaceutical Group has 3 warning signs (and 2 which are concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.