Does China Regenerative Medicine International (HKG:8158) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 China Regenerative Medicine International Limited (HKG:8158) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Regenerative Medicine International

What Is China Regenerative Medicine International's Debt?

You can click the graphic below for the historical numbers, but it shows that China Regenerative Medicine International had HK$220.2m of debt in June 2020, down from HK$282.4m, one year before. However, it also had HK$32.4m in cash, and so its net debt is HK$187.8m.

A Look At China Regenerative Medicine International's Liabilities

Zooming in on the latest balance sheet data, we can see that China Regenerative Medicine International had liabilities of HK$311.5m due within 12 months and liabilities of HK$163.5m due beyond that. On the other hand, it had cash of HK$32.4m and HK$253.0m worth of receivables due within a year. So it has liabilities totalling HK$189.5m more than its cash and near-term receivables, combined.

Given China Regenerative Medicine International has a market capitalization of HK$1.17b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is China Regenerative Medicine International's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year China Regenerative Medicine International wasn't profitable at an EBIT level, but managed to grow its revenue by 358%, to HK$154m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, China Regenerative Medicine International still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$239m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$324m in negative free cash flow over the last twelve months. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that China Regenerative Medicine International is showing 4 warning signs in our investment analysis , and 3 of those shouldn't be ignored...

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.

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This article by Simply Wall St is general in nature. 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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