Is CStone Pharmaceuticals (HKG:2616) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies CStone Pharmaceuticals (HKG:2616) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 CStone Pharmaceuticals

What Is CStone Pharmaceuticals's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 CStone Pharmaceuticals had debt of CN¥173.3m, up from CN¥152.8m in one year. However, its balance sheet shows it holds CN¥1.03b in cash, so it actually has CN¥855.5m net cash.

A Look At CStone Pharmaceuticals' Liabilities

According to the last reported balance sheet, CStone Pharmaceuticals had liabilities of CN¥803.1m due within 12 months, and liabilities of CN¥252.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.03b as well as receivables valued at CN¥185.9m due within 12 months. So it actually has CN¥158.6m more liquid assets than total liabilities.

This surplus suggests that CStone Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CStone Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CStone Pharmaceuticals can strengthen its balance sheet over time. 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, CStone Pharmaceuticals reported revenue of CN¥481m, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is CStone Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year CStone Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥539m of cash and made a loss of CN¥750m. But the saving grace is the CN¥855.5m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 2 warning signs for CStone Pharmaceuticals that you should be aware of before investing here.

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.