Is Austar Lifesciences (HKG:6118) A Risky Investment?

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.' 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. We can see that Austar Lifesciences Limited (HKG:6118) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Austar Lifesciences

What Is Austar Lifesciences's Debt?

As you can see below, at the end of December 2021, Austar Lifesciences had CN¥110.4m of debt, up from CN¥31.4m a year ago. Click the image for more detail. But on the other hand it also has CN¥219.7m in cash, leading to a CN¥109.4m net cash position.

How Strong Is Austar Lifesciences' Balance Sheet?

We can see from the most recent balance sheet that Austar Lifesciences had liabilities of CN¥1.14b falling due within a year, and liabilities of CN¥120.2m due beyond that. Offsetting this, it had CN¥219.7m in cash and CN¥672.8m in receivables that were due within 12 months. So its liabilities total CN¥363.8m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Austar Lifesciences has a market capitalization of CN¥1.37b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 293% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Austar Lifesciences'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Austar Lifesciences 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, Austar Lifesciences saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

Although Austar Lifesciences's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥109.4m. And it impressed us with its EBIT growth of 293% over the last year. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Austar Lifesciences (of which 1 is concerning!) you should know about.

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.