Is Lansen Pharmaceutical Holdings (HKG:503) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Lansen Pharmaceutical Holdings Limited (HKG:503) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its 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$29.1m at the end of June 2021, a reduction from US$31.5m over a year. However, its balance sheet shows it holds US$110.6m in cash, so it actually has US$81.5m net cash.

A Look At Lansen Pharmaceutical Holdings' Liabilities

We can see from the most recent balance sheet that Lansen Pharmaceutical Holdings had liabilities of US$52.0m falling due within a year, and liabilities of US$2.47m due beyond that. Offsetting this, it had US$110.6m in cash and US$43.4m in receivables that were due within 12 months. So it can boast US$99.6m more liquid assets than total liabilities.

This luscious liquidity implies that Lansen Pharmaceutical Holdings' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Lansen Pharmaceutical Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Lansen Pharmaceutical Holdings has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lansen Pharmaceutical Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Lansen Pharmaceutical Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Lansen Pharmaceutical Holdings actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Lansen Pharmaceutical Holdings has US$81.5m in net cash and a strong balance sheet. And it impressed us with free cash flow of US$13m, being 145% of its EBIT. The bottom line is that Lansen Pharmaceutical Holdings's use of debt is absolutely fine. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Lansen Pharmaceutical Holdings that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.