Does Ascentage Pharma Group International (HKG:6855) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Ascentage Pharma Group International (HKG:6855) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ascentage Pharma Group International

How Much Debt Does Ascentage Pharma Group International Carry?

As you can see below, at the end of June 2021, Ascentage Pharma Group International had CN¥646.5m of debt, up from CN¥274.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.53b in cash, so it actually has CN¥885.2m net cash.

A Look At Ascentage Pharma Group International's Liabilities

Zooming in on the latest balance sheet data, we can see that Ascentage Pharma Group International had liabilities of CN¥193.8m due within 12 months and liabilities of CN¥764.5m due beyond that. Offsetting these obligations, it had cash of CN¥1.53b as well as receivables valued at CN¥10.3m due within 12 months. So it can boast CN¥583.7m more liquid assets than total liabilities.

This surplus suggests that Ascentage Pharma Group International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, 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.

Over 12 months, Ascentage Pharma Group International reported revenue of CN¥23m, which is a gain of 54%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Ascentage Pharma Group International?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Ascentage Pharma Group International had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥1.0b and booked a CN¥735m accounting loss. However, it has net cash of CN¥885.2m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Ascentage Pharma Group International may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Ascentage Pharma Group International has 4 warning signs we think 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.

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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