Is Kintor Pharmaceutical (HKG:9939) Using Debt Sensibly?

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.' 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. We note that Kintor Pharmaceutical Limited (HKG:9939) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kintor Pharmaceutical

What Is Kintor Pharmaceutical's Net Debt?

As you can see below, Kintor Pharmaceutical had CN¥137.7m of debt at June 2021, down from CN¥208.2m a year prior. But on the other hand it also has CN¥1.76b in cash, leading to a CN¥1.62b net cash position.

How Healthy Is Kintor Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Kintor Pharmaceutical had liabilities of CN¥70.0m due within 12 months, and liabilities of CN¥170.9m due beyond 12 months. On the other hand, it had cash of CN¥1.76b and CN¥141.3m worth of receivables due within a year. So it actually has CN¥1.66b more liquid assets than total liabilities.

This short term liquidity is a sign that Kintor Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kintor Pharmaceutical 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 ultimately the future profitability of the business will decide if Kintor Pharmaceutical 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.

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 we do note that Kintor Pharmaceutical 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 CN¥759m and booked a CN¥639m accounting loss. With only CN¥1.62b 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Kintor Pharmaceutical (of which 1 is potentially serious!) you should know about.

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.

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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.
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