Is CStone Pharmaceuticals (HKG:2616) Weighed On By Its Debt Load?

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 note that CStone Pharmaceuticals (HKG:2616) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for CStone Pharmaceuticals

How Much Debt Does CStone Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 CStone Pharmaceuticals had CN¥306.4m of debt, an increase on CN¥173.3m, over one year. However, its balance sheet shows it holds CN¥857.7m in cash, so it actually has CN¥551.2m net cash.

How Healthy Is CStone Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that CStone Pharmaceuticals had liabilities of CN¥713.2m due within a year, and liabilities of CN¥351.2m falling due after that. Offsetting these obligations, it had cash of CN¥857.7m as well as receivables valued at CN¥179.1m due within 12 months. So it has liabilities totalling CN¥27.7m more than its cash and near-term receivables, combined.

Having regard to CStone Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥2.89b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, CStone Pharmaceuticals 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 future earnings, more than anything, that will determine CStone Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, CStone Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to CN¥457m, which is a fall of 5.1%. We would much prefer see growth.

So How Risky Is CStone Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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¥284m of cash and made a loss of CN¥142m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥551.2m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 1 warning sign for CStone Pharmaceuticals that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.