We Think TOT BIOPHARM International (HKG:1875) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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. 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 TOT BIOPHARM International

What Is TOT BIOPHARM International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 TOT BIOPHARM International had CN¥206.0m of debt, an increase on none, over one year. On the flip side, it has CN¥155.4m in cash leading to net debt of about CN¥50.6m.

How Strong Is TOT BIOPHARM International's Balance Sheet?

According to the last reported balance sheet, TOT BIOPHARM International had liabilities of CN¥260.8m due within 12 months, and liabilities of CN¥114.4m due beyond 12 months. On the other hand, it had cash of CN¥155.4m and CN¥103.6m worth of receivables due within a year. So it has liabilities totalling CN¥116.2m more than its cash and near-term receivables, combined.

Since publicly traded TOT BIOPHARM International shares are worth a total of CN¥1.77b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TOT BIOPHARM International's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, TOT BIOPHARM International reported revenue of CN¥76m, which is a gain of 239%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Even though TOT BIOPHARM International managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable CN¥255m at the EBIT level. 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. Another cause for caution is that is bled CN¥292m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example TOT BIOPHARM International has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.