Ascentage Pharma Group International (HKG:6855) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Ascentage Pharma Group International (HKG:6855) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out the opportunities and risks within the HK Biotechs industry.

How Much Debt Does Ascentage Pharma Group International Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Ascentage Pharma Group International had CN¥1.54b of debt, an increase on CN¥646.5m, over one year. However, it does have CN¥1.70b in cash offsetting this, leading to net cash of CN¥158.6m.

How Strong Is Ascentage Pharma Group International's Balance Sheet?

We can see from the most recent balance sheet that Ascentage Pharma Group International had liabilities of CN¥612.3m falling due within a year, and liabilities of CN¥1.55b due beyond that. Offsetting this, it had CN¥1.70b in cash and CN¥80.7m in receivables that were due within 12 months. So its liabilities total CN¥378.7m more than the combination of its cash and short-term receivables.

Given Ascentage Pharma Group International has a market capitalization of CN¥4.88b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Ascentage Pharma Group International boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ascentage Pharma Group International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Ascentage Pharma Group International wasn't profitable at an EBIT level, but managed to grow its revenue by 386%, to CN¥111m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Ascentage Pharma Group International?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Ascentage Pharma Group International lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥954m and booked a CN¥812m accounting loss. However, it has net cash of CN¥158.6m, so it has a bit of time before it will need more capital. Importantly, Ascentage Pharma Group International's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Ascentage Pharma Group International that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.