Is Tianda Pharmaceuticals (HKG:455) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Tianda Pharmaceuticals Limited (HKG:455) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tianda Pharmaceuticals

How Much Debt Does Tianda Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that Tianda Pharmaceuticals had HK$104.9m of debt in December 2023, down from HK$126.6m, one year before. However, its balance sheet shows it holds HK$170.9m in cash, so it actually has HK$66.0m net cash.

How Healthy Is Tianda Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Tianda Pharmaceuticals had liabilities of HK$313.3m falling due within a year, and liabilities of HK$12.0m due beyond that. On the other hand, it had cash of HK$170.9m and HK$106.4m worth of receivables due within a year. So it has liabilities totalling HK$48.1m more than its cash and near-term receivables, combined.

Given Tianda Pharmaceuticals has a market capitalization of HK$548.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Tianda 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 Tianda Pharmaceuticals's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Tianda Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 2.7%, to HK$532m. That's not what we would hope to see.

So How Risky Is Tianda Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Tianda Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$116m of cash and made a loss of HK$24m. But at least it has HK$66.0m on the balance sheet to spend on growth, near-term. 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. Case in point: We've spotted 2 warning signs for Tianda Pharmaceuticals you should be aware of, and 1 of them shouldn't be ignored.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com