Everest Medicines (HKG:1952) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Everest Medicines Limited (HKG:1952) does use debt in its business. But the real question is whether this debt is making the company risky.

Our free stock report includes 1 warning sign investors should be aware of before investing in Everest Medicines. Read for free now.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Everest Medicines Carry?

As you can see below, at the end of December 2024, Everest Medicines had CN¥526.1m of debt, up from CN¥480.6m a year ago. Click the image for more detail. But it also has CN¥1.60b in cash to offset that, meaning it has CN¥1.08b net cash.

A Look At Everest Medicines' Liabilities

Zooming in on the latest balance sheet data, we can see that Everest Medicines had liabilities of CN¥793.5m due within 12 months and liabilities of CN¥92.5m due beyond that. On the other hand, it had cash of CN¥1.60b and CN¥388.3m worth of receivables due within a year. So it actually has CN¥1.11b more liquid assets than total liabilities.

This surplus suggests that Everest Medicines has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Everest Medicines boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Everest Medicines can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

See our latest analysis for Everest Medicines

In the last year Everest Medicines wasn't profitable at an EBIT level, but managed to grow its revenue by 461%, to CN¥707m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Everest Medicines?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Everest Medicines had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥884m and booked a CN¥1.0b accounting loss. But at least it has CN¥1.08b on the balance sheet to spend on growth, near-term. The good news for shareholders is that Everest Medicines has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Everest Medicines you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.