Lansen Pharmaceutical Holdings (HKG:503) Has A Rock Solid Balance Sheet

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.' 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. We note that Lansen Pharmaceutical Holdings Limited (HKG:503) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Lansen Pharmaceutical Holdings

What Is Lansen Pharmaceutical Holdings's Debt?

The image below, which you can click on for greater detail, shows that Lansen Pharmaceutical Holdings had debt of US$19.7m at the end of June 2022, a reduction from US$29.1m over a year. However, its balance sheet shows it holds US$53.2m in cash, so it actually has US$33.4m net cash.

A Look At Lansen Pharmaceutical Holdings' Liabilities

The latest balance sheet data shows that Lansen Pharmaceutical Holdings had liabilities of US$41.4m due within a year, and liabilities of US$2.16m falling due after that. Offsetting this, it had US$53.2m in cash and US$38.7m in receivables that were due within 12 months. So it can boast US$48.3m more liquid assets than total liabilities.

This surplus liquidity suggests that Lansen Pharmaceutical Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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.

Even more impressive was the fact that Lansen Pharmaceutical Holdings grew its EBIT by 123% 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 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$33.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 197% 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. 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 instance, we've identified 3 warning signs for Lansen Pharmaceutical Holdings that you should be aware of.

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.