Health Check: How Prudently Does Sihuan Pharmaceutical Holdings Group (HKG:460) Use Debt?

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.' 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. We can see that Sihuan Pharmaceutical Holdings Group Ltd. (HKG:460) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sihuan Pharmaceutical Holdings Group

How Much Debt Does Sihuan Pharmaceutical Holdings Group Carry?

As you can see below, at the end of June 2023, Sihuan Pharmaceutical Holdings Group had CN¥1.27b of debt, up from CN¥1.12b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥4.51b in cash, so it actually has CN¥3.24b net cash.

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

We can see from the most recent balance sheet that Sihuan Pharmaceutical Holdings Group had liabilities of CN¥2.24b falling due within a year, and liabilities of CN¥4.28b due beyond that. Offsetting these obligations, it had cash of CN¥4.51b as well as receivables valued at CN¥1.09b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥924.4m.

Given Sihuan Pharmaceutical Holdings Group has a market capitalization of CN¥5.85b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sihuan Pharmaceutical Holdings Group 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 ultimately the future profitability of the business will decide if Sihuan Pharmaceutical Holdings Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Sihuan Pharmaceutical Holdings Group had a loss before interest and tax, and actually shrunk its revenue by 32%, to CN¥1.8b. To be frank that doesn't bode well.

So How Risky Is Sihuan Pharmaceutical Holdings Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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¥697m of cash and made a loss of CN¥2.0b. With only CN¥3.24b on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Sihuan Pharmaceutical Holdings Group's profit, revenue, and operating cashflow have changed over the last few years.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.