Is CStone Pharmaceuticals (HKG:2616) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that CStone Pharmaceuticals (HKG:2616) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CStone Pharmaceuticals

What Is CStone Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 CStone Pharmaceuticals had CN¥72.7m of debt, an increase on CN¥23.8m, over one year. But on the other hand it also has CN¥2.58b in cash, leading to a CN¥2.50b net cash position.

A Look At CStone Pharmaceuticals' Liabilities

We can see from the most recent balance sheet that CStone Pharmaceuticals had liabilities of CN¥467.1m falling due within a year, and liabilities of CN¥91.3m due beyond that. Offsetting these obligations, it had cash of CN¥2.58b as well as receivables valued at CN¥50.4m due within 12 months. So it can boast CN¥2.07b more liquid assets than total liabilities.

This excess liquidity suggests that CStone Pharmaceuticals is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, CStone Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine CStone Pharmaceuticals'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.

In the last year CStone Pharmaceuticals managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is CStone Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that CStone Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥848m of cash and made a loss of CN¥1.3b. But the saving grace is the CN¥2.50b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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 instance, we've identified 2 warning signs for CStone Pharmaceuticals that 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.

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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.