Does Sihuan Pharmaceutical Holdings Group (HKG:460) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Sihuan Pharmaceutical Holdings Group Ltd. (HKG:460) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that 460 is potentially overvalued!

What Is Sihuan Pharmaceutical Holdings Group's Debt?

As you can see below, at the end of June 2022, Sihuan Pharmaceutical Holdings Group had CN¥1.12b of debt, up from CN¥811.9m a year ago. Click the image for more detail. But it also has CN¥5.25b in cash to offset that, meaning it has CN¥4.13b net cash.

How Healthy Is Sihuan Pharmaceutical Holdings Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sihuan Pharmaceutical Holdings Group had liabilities of CN¥3.06b due within 12 months and liabilities of CN¥3.25b due beyond that. Offsetting these obligations, it had cash of CN¥5.25b as well as receivables valued at CN¥1.29b due within 12 months. So it actually has CN¥226.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Sihuan Pharmaceutical Holdings Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sihuan Pharmaceutical Holdings Group 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 ultimately the future profitability of the business will decide if Sihuan Pharmaceutical Holdings Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Sihuan Pharmaceutical Holdings Group made a loss at the EBIT level, and saw its revenue drop to CN¥2.8b, which is a fall of 14%. We would much prefer see growth.

So How Risky Is Sihuan Pharmaceutical Holdings Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Sihuan Pharmaceutical Holdings Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥306m of cash and made a loss of CN¥155m. Given it only has net cash of CN¥4.13b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 example, we've discovered 1 warning sign for Sihuan Pharmaceutical Holdings Group that you should be aware of before investing here.

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.