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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that InnoCare Pharma Limited (HKG:9969) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for InnoCare Pharma

What Is InnoCare Pharma's Debt?

As you can see below, at the end of June 2022, InnoCare Pharma had CN¥1.50b of debt, up from CN¥1.17b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥6.21b in cash, so it actually has CN¥4.71b net cash.

How Healthy Is InnoCare Pharma's Balance Sheet?

The latest balance sheet data shows that InnoCare Pharma had liabilities of CN¥304.3m due within a year, and liabilities of CN¥1.82b falling due after that. Offsetting these obligations, it had cash of CN¥6.21b as well as receivables valued at CN¥112.4m due within 12 months. So it actually has CN¥4.20b more liquid assets than total liabilities.

This excess liquidity suggests that InnoCare Pharma is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that InnoCare Pharma has more cash than debt is arguably a good indication that it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year InnoCare Pharma wasn't profitable at an EBIT level, but managed to grow its revenue by 1,061%, to CN¥1.2b. That's virtually the hole-in-one of revenue growth!

So How Risky Is InnoCare Pharma?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year InnoCare Pharma had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥11k and booked a CN¥296m accounting loss. But the saving grace is the CN¥4.71b on the balance sheet. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that InnoCare Pharma has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for InnoCare Pharma that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.