Is Kintor Pharmaceutical (HKG:9939) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Kintor Pharmaceutical Limited (HKG:9939) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 Kintor Pharmaceutical

What Is Kintor Pharmaceutical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kintor Pharmaceutical had CN¥234.3m of debt in June 2024, down from CN¥314.9m, one year before. However, it does have CN¥333.8m in cash offsetting this, leading to net cash of CN¥99.5m.

A Look At Kintor Pharmaceutical's Liabilities

We can see from the most recent balance sheet that Kintor Pharmaceutical had liabilities of CN¥238.3m falling due within a year, and liabilities of CN¥109.7m due beyond that. Offsetting these obligations, it had cash of CN¥333.8m as well as receivables valued at CN¥13.6m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Kintor Pharmaceutical's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥641.7m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Kintor Pharmaceutical 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 it is future earnings, more than anything, that will determine Kintor Pharmaceutical's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Since Kintor Pharmaceutical doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Kintor Pharmaceutical?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Kintor Pharmaceutical lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥287m and booked a CN¥920m accounting loss. However, it has net cash of CN¥99.5m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Kintor Pharmaceutical (2 don't sit too well with us) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.