Is Lansen Pharmaceutical Holdings (HKG:503) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Lansen Pharmaceutical Holdings Limited (HKG:503) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

View 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$18.2m at the end of December 2022, a reduction from US$24.7m over a year. However, it does have US$51.3m in cash offsetting this, leading to net cash of US$33.1m.

How Healthy Is Lansen Pharmaceutical Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lansen Pharmaceutical Holdings had liabilities of US$60.0m due within 12 months and liabilities of US$2.04m due beyond that. Offsetting this, it had US$51.3m in cash and US$44.1m in receivables that were due within 12 months. So it actually has US$33.4m 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. 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!

Even more impressive was the fact that Lansen Pharmaceutical Holdings grew its EBIT by 161% over twelve months. That boost will make it even easier to pay down debt going forward. 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 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Lansen Pharmaceutical Holdings has net cash of US$33.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 170% of that EBIT to free cash flow, bringing in US$23m. The bottom line is that Lansen Pharmaceutical Holdings's use of debt is absolutely fine. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Lansen Pharmaceutical Holdings you should know about.

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.