Is TOT BIOPHARM International (HKG:1875) Using Debt In A Risky Way?

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 TOT BIOPHARM International Company Limited (HKG:1875) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for TOT BIOPHARM International

What Is TOT BIOPHARM International's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 TOT BIOPHARM International had CN¥344.3m of debt, an increase on CN¥287.6m, over one year. But on the other hand it also has CN¥351.6m in cash, leading to a CN¥7.32m net cash position.

How Healthy Is TOT BIOPHARM International's Balance Sheet?

The latest balance sheet data shows that TOT BIOPHARM International had liabilities of CN¥382.5m due within a year, and liabilities of CN¥356.9m falling due after that. Offsetting these obligations, it had cash of CN¥351.6m as well as receivables valued at CN¥143.1m due within 12 months. So it has liabilities totalling CN¥244.7m more than its cash and near-term receivables, combined.

Given TOT BIOPHARM International has a market capitalization of CN¥1.23b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, TOT BIOPHARM International also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is TOT BIOPHARM International's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year TOT BIOPHARM International wasn't profitable at an EBIT level, but managed to grow its revenue by 77%, to CN¥781m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is TOT BIOPHARM International?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that TOT BIOPHARM International had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥214m of cash and made a loss of CN¥38m. However, it has net cash of CN¥7.32m, so it has a bit of time before it will need more capital. TOT BIOPHARM International's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how TOT BIOPHARM International's profit, revenue, and operating cashflow have changed over the last few years.

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.

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

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.