Is Extrawell Pharmaceutical Holdings (HKG:858) Using Debt Sensibly?

Warren Buffett famously said, '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 Extrawell Pharmaceutical Holdings Limited (HKG:858) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

Check out our latest analysis for Extrawell Pharmaceutical Holdings

How Much Debt Does Extrawell Pharmaceutical Holdings Carry?

As you can see below, at the end of September 2021, Extrawell Pharmaceutical Holdings had HK$76.3m of debt, up from HK$64.2m a year ago. Click the image for more detail. However, it does have HK$129.7m in cash offsetting this, leading to net cash of HK$53.4m.

A Look At Extrawell Pharmaceutical Holdings' Liabilities

The latest balance sheet data shows that Extrawell Pharmaceutical Holdings had liabilities of HK$58.2m due within a year, and liabilities of HK$82.4m falling due after that. On the other hand, it had cash of HK$129.7m and HK$51.7m worth of receivables due within a year. So it can boast HK$40.8m more liquid assets than total liabilities.

This excess liquidity suggests that Extrawell Pharmaceutical Holdings is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Extrawell Pharmaceutical Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Extrawell Pharmaceutical Holdings will need earnings to service that debt. 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.

Over 12 months, Extrawell Pharmaceutical Holdings reported revenue of HK$86m, which is a gain of 16%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Extrawell Pharmaceutical Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Extrawell Pharmaceutical Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$5.7m and booked a HK$107m accounting loss. With only HK$53.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 3 warning signs for Extrawell Pharmaceutical Holdings (1 is a bit concerning!) that you should be aware of before investing here.

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.