Would Touyun Biotech Group (HKG:1332) Be Better Off With Less 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.' 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. Importantly, Touyun Biotech Group Limited (HKG:1332) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its 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 Touyun Biotech Group had HK$356.3m of debt in December 2023, down from HK$486.6m, one year before. On the flip side, it has HK$36.0m in cash leading to net debt of about HK$320.3m.

A Look At Touyun Biotech Group's Liabilities

We can see from the most recent balance sheet that Touyun Biotech Group had liabilities of HK$380.7m falling due within a year, and liabilities of HK$205.6m due beyond that. Offsetting these obligations, it had cash of HK$36.0m as well as receivables valued at HK$69.7m due within 12 months. So its liabilities total HK$480.5m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of HK$665.0m, so it does suggest shareholders should keep an eye on Touyun Biotech Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Touyun Biotech Group will need earnings to service that debt. 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$199m, which is a fall of 37%. To be frank that doesn't bode well.

Caveat Emptor

While Touyun Biotech 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. Indeed, it lost a very considerable HK$90m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$269m into a profit. So to be blunt we do think it is 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. To that end, you should learn about the 2 warning signs we've spotted with Touyun Biotech Group (including 1 which 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.

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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.