Despite Lacking Profits InnoCare Pharma (HKG:9969) Seems To Be On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, InnoCare Pharma Limited (HKG:9969) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for InnoCare Pharma

What Is InnoCare Pharma's Debt?

As you can see below, InnoCare Pharma had CN¥1.17b of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥6.25b in cash to offset that, meaning it has CN¥5.08b net cash.

A Look At InnoCare Pharma's Liabilities

The latest balance sheet data shows that InnoCare Pharma had liabilities of CN¥143.5m due within a year, and liabilities of CN¥1.33b falling due after that. Offsetting this, it had CN¥6.25b in cash and CN¥104.2m in receivables that were due within 12 months. So it actually has CN¥4.88b more liquid assets than total liabilities.

This surplus suggests that InnoCare Pharma is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, InnoCare Pharma 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 InnoCare Pharma 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.

Over 12 months, InnoCare Pharma reported revenue of CN¥102m, which is a gain of 7,195%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is InnoCare Pharma?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months InnoCare Pharma lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥459m and booked a CN¥338m accounting loss. But the saving grace is the CN¥5.08b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, InnoCare Pharma's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. To that end, you should be aware of the 3 warning signs we've spotted with InnoCare Pharma .

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.