Innovative Pharmaceutical Biotech (HKG:399) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Innovative Pharmaceutical Biotech Limited (HKG:399) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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 Innovative Pharmaceutical Biotech

How Much Debt Does Innovative Pharmaceutical Biotech Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Innovative Pharmaceutical Biotech had HK$1.24b of debt, an increase on HK$984.8m, over one year. And it doesn't have much cash, so its net debt is about the same.

A Look At Innovative Pharmaceutical Biotech's Liabilities

Zooming in on the latest balance sheet data, we can see that Innovative Pharmaceutical Biotech had liabilities of HK$1.15b due within 12 months and liabilities of HK$96.4m due beyond that. Offsetting these obligations, it had cash of HK$1.33m as well as receivables valued at HK$6.41m due within 12 months. So it has liabilities totalling HK$1.24b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$402.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Innovative Pharmaceutical Biotech would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Innovative Pharmaceutical Biotech will need earnings to service that debt. 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.

Over 12 months, Innovative Pharmaceutical Biotech made a loss at the EBIT level, and saw its revenue drop to HK$8.1m, which is a fall of 28%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Innovative Pharmaceutical Biotech's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$21m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through HK$18m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Innovative Pharmaceutical Biotech (including 1 which is potentially serious) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.