Austar Lifesciences (HKG:6118) Has A Pretty Healthy Balance Sheet

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, Austar Lifesciences Limited (HKG:6118) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Austar Lifesciences

What Is Austar Lifesciences's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Austar Lifesciences had CN¥43.4m of debt, an increase on CN¥21.6m, over one year. However, it does have CN¥318.2m in cash offsetting this, leading to net cash of CN¥274.8m.

How Healthy Is Austar Lifesciences' Balance Sheet?

According to the last reported balance sheet, Austar Lifesciences had liabilities of CN¥1.02b due within 12 months, and liabilities of CN¥63.2m due beyond 12 months. On the other hand, it had cash of CN¥318.2m and CN¥657.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥105.5m.

This state of affairs indicates that Austar Lifesciences' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥9.64b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Austar Lifesciences also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Austar Lifesciences grew its EBIT by 317% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Austar Lifesciences will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Austar Lifesciences 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. During the last three years, Austar Lifesciences burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Austar Lifesciences has CN¥274.8m in net cash. And we liked the look of last year's 317% year-on-year EBIT growth. So we are not troubled with Austar Lifesciences's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Austar Lifesciences (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.

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.

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