China Pioneer Pharma Holdings (HKG:1345) Has A Rock Solid Balance Sheet

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that China Pioneer Pharma Holdings Limited (HKG:1345) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for China Pioneer Pharma Holdings

What Is China Pioneer Pharma Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China Pioneer Pharma Holdings had CN¥44.4m of debt in June 2020, down from CN¥62.6m, one year before. However, it does have CN¥189.1m in cash offsetting this, leading to net cash of CN¥144.7m.

A Look At China Pioneer Pharma Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that China Pioneer Pharma Holdings had liabilities of CN¥281.2m due within 12 months and liabilities of CN¥8.01m due beyond that. On the other hand, it had cash of CN¥189.1m and CN¥339.9m worth of receivables due within a year. So it can boast CN¥239.7m more liquid assets than total liabilities.

This excess liquidity suggests that China Pioneer Pharma Holdings is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that China Pioneer Pharma Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that China Pioneer Pharma Holdings has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Pioneer Pharma Holdings 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Pioneer Pharma Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, China Pioneer Pharma Holdings produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case China Pioneer Pharma Holdings has CN¥144.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 35% year-on-year EBIT growth. The bottom line is that we do not find China Pioneer Pharma Holdings's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for China Pioneer Pharma Holdings you should be aware of, and 1 of them can't be ignored.

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.

If you’re looking to trade China Pioneer Pharma Holdings, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.