Is Tianda Pharmaceuticals (HKG:455) 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. As with many other companies Tianda Pharmaceuticals Limited (HKG:455) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tianda Pharmaceuticals

What Is Tianda Pharmaceuticals's Net Debt?

As you can see below, Tianda Pharmaceuticals had HK$91.9m of debt at June 2024, down from HK$126.6m a year prior. But it also has HK$103.8m in cash to offset that, meaning it has HK$11.9m 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$253.1m falling due within a year, and liabilities of HK$7.25m due beyond that. On the other hand, it had cash of HK$103.8m and HK$65.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$91.3m.

This deficit isn't so bad because Tianda Pharmaceuticals is worth HK$406.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Tianda Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tianda Pharmaceuticals will need earnings to service that debt. 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 had a loss before interest and tax, and actually shrunk its revenue by 29%, to HK$385m. To be frank that doesn't bode well.

So How Risky Is Tianda Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$68m of cash and made a loss of HK$47m. However, it has net cash of HK$11.9m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 example, we've discovered 2 warning signs for Tianda Pharmaceuticals (1 can't be ignored!) that you should be aware of before investing here.

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.