Ascentage Pharma Group International (HKG:6855) Is Making Moderate Use Of Debt

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. As with many other companies Ascentage Pharma Group International (HKG:6855) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 Ascentage Pharma Group International

What Is Ascentage Pharma Group International's Net Debt?

As you can see below, at the end of June 2023, Ascentage Pharma Group International had CN¥1.65b of debt, up from CN¥1.54b a year ago. Click the image for more detail. On the flip side, it has CN¥1.58b in cash leading to net debt of about CN¥73.3m.

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

Zooming in on the latest balance sheet data, we can see that Ascentage Pharma Group International had liabilities of CN¥642.9m due within 12 months and liabilities of CN¥1.68b due beyond that. Offsetting these obligations, it had cash of CN¥1.58b as well as receivables valued at CN¥81.6m due within 12 months. So it has liabilities totalling CN¥654.7m more than its cash and near-term receivables, combined.

Given Ascentage Pharma Group International has a market capitalization of CN¥6.31b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Ascentage Pharma Group International has virtually no net debt, 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 it is future earnings, more than anything, that will determine Ascentage Pharma Group International's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Ascentage Pharma Group International wasn't profitable at an EBIT level, but managed to grow its revenue by 132%, to CN¥257m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, Ascentage Pharma Group International still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥839m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥814m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Ascentage Pharma Group International you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.