Does Tianda Pharmaceuticals (HKG:455) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Tianda Pharmaceuticals Limited (HKG:455) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tianda Pharmaceuticals

What Is Tianda Pharmaceuticals's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Tianda Pharmaceuticals had debt of HK$149.6m, up from HK$64.5m in one year. But on the other hand it also has HK$206.6m in cash, leading to a HK$57.0m net cash position.

How Healthy Is Tianda Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Tianda Pharmaceuticals had liabilities of HK$202.6m due within 12 months, and liabilities of HK$145.7m due beyond 12 months. Offsetting this, it had HK$206.6m in cash and HK$137.2m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Tianda Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the HK$634.3m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Tianda 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 it is Tianda Pharmaceuticals's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Tianda Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to HK$523m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Tianda Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Tianda Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$151m of cash and made a loss of HK$30m. Given it only has net cash of HK$57.0m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Tianda Pharmaceuticals may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Tianda Pharmaceuticals you should be aware of, and 1 of them is significant.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.