Touyun Biotech Group (HKG:1332) Is Carrying A Fair Bit Of Debt

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 Touyun Biotech Group Limited (HKG:1332) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Touyun Biotech Group

What Is Touyun Biotech Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Touyun Biotech Group had HK$452.7m of debt, an increase on HK$431.1m, over one year. However, it does have HK$46.3m in cash offsetting this, leading to net debt of about HK$406.4m.

How Healthy Is Touyun Biotech Group's Balance Sheet?

According to the last reported balance sheet, Touyun Biotech Group had liabilities of HK$336.4m due within 12 months, and liabilities of HK$212.7m due beyond 12 months. Offsetting these obligations, it had cash of HK$46.3m as well as receivables valued at HK$66.3m due within 12 months. So its liabilities total HK$436.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Touyun Biotech Group is worth HK$1.40b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Touyun Biotech Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Touyun Biotech Group made a loss at the EBIT level, and saw its revenue drop to HK$253m, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

Not only did Touyun Biotech Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$61m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through HK$39m of cash over the last year. So to be blunt we think it is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Touyun Biotech Group .

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.