Does Lansen Pharmaceutical Holdings (HKG:503) 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. As with many other companies Lansen Pharmaceutical Holdings Limited (HKG:503) makes use of debt. But the real question is whether this debt is making the company risky.

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Lansen Pharmaceutical Holdings

What Is Lansen Pharmaceutical Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Lansen Pharmaceutical Holdings had debt of US$17.6m at the end of June 2023, a reduction from US$19.7m over a year. But it also has US$46.4m in cash to offset that, meaning it has US$28.8m net cash.

A Look At Lansen Pharmaceutical Holdings' Liabilities

The latest balance sheet data shows that Lansen Pharmaceutical Holdings had liabilities of US$49.4m due within a year, and liabilities of US$1.95m falling due after that. Offsetting these obligations, it had cash of US$46.4m as well as receivables valued at US$37.2m due within 12 months. So it actually has US$32.2m more liquid assets than total liabilities.

This excess liquidity is a great indication that Lansen Pharmaceutical Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Lansen Pharmaceutical Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Lansen Pharmaceutical Holdings grew its EBIT by 4.4% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lansen Pharmaceutical Holdings 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Lansen Pharmaceutical Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Lansen Pharmaceutical Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Lansen Pharmaceutical Holdings has US$28.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$851k, being 126% of its EBIT. So we don't think Lansen Pharmaceutical Holdings's use of debt is risky. 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. Be aware that Lansen Pharmaceutical Holdings is showing 2 warning signs in our investment analysis , and 1 of those 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.