Is Shenzhen Neptunus Interlong Bio-technique (HKG:8329) Using Too Much Debt?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Shenzhen Neptunus Interlong Bio-technique Company Limited (HKG:8329) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
See our latest analysis for Shenzhen Neptunus Interlong Bio-technique
What Is Shenzhen Neptunus Interlong Bio-technique's Debt?
As you can see below, at the end of June 2021, Shenzhen Neptunus Interlong Bio-technique had CN¥40.8m of debt, up from CN¥39.0m a year ago. Click the image for more detail. However, it does have CN¥262.0m in cash offsetting this, leading to net cash of CN¥221.2m.
How Healthy Is Shenzhen Neptunus Interlong Bio-technique's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Shenzhen Neptunus Interlong Bio-technique had liabilities of CN¥310.7m due within 12 months and liabilities of CN¥30.1m due beyond that. Offsetting these obligations, it had cash of CN¥262.0m as well as receivables valued at CN¥229.8m due within 12 months. So it actually has CN¥151.0m more liquid assets than total liabilities.
This surplus strongly suggests that Shenzhen Neptunus Interlong Bio-technique has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Shenzhen Neptunus Interlong Bio-technique boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Shenzhen Neptunus Interlong Bio-technique's saving grace is its low debt levels, because its EBIT has tanked 43% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenzhen Neptunus Interlong Bio-technique'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shenzhen Neptunus Interlong Bio-technique has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Shenzhen Neptunus Interlong Bio-technique created free cash flow amounting to 13% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Neptunus Interlong Bio-technique has net cash of CN¥221.2m, as well as more liquid assets than liabilities. So we are not troubled with Shenzhen Neptunus Interlong Bio-technique'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. We've identified 3 warning signs with Shenzhen Neptunus Interlong Bio-technique (at least 1 which is concerning) , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
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.
About SEHK:8329
Shenzhen Neptunus Interlong Bio-technique
Engages in the research and development, manufacturing, and selling of medicines and medical devices in the People’s Republic of China.
Excellent balance sheet and good value.