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

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.' 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. As with many other companies InnoCare Pharma Limited (HKG:9969) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is InnoCare Pharma's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2025 InnoCare Pharma had debt of CN¥1.52b, up from CN¥343.3m in one year. However, its balance sheet shows it holds CN¥7.01b in cash, so it actually has CN¥5.49b net cash.

How Strong Is InnoCare Pharma's Balance Sheet?

We can see from the most recent balance sheet that InnoCare Pharma had liabilities of CN¥1.01b falling due within a year, and liabilities of CN¥1.64b due beyond that. Offsetting these obligations, it had cash of CN¥7.01b as well as receivables valued at CN¥363.8m due within 12 months. So it actually has CN¥4.72b more liquid assets than total liabilities.

This short term liquidity is a sign that InnoCare Pharma could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, InnoCare Pharma 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 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.

Check out our latest analysis for InnoCare Pharma

In the last year InnoCare Pharma wasn't profitable at an EBIT level, but managed to grow its revenue by 71%, to CN¥1.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

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¥292m and booked a CN¥280m accounting loss. But the saving grace is the CN¥5.49b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. InnoCare Pharma's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger 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. For example - InnoCare Pharma has 2 warning signs we think you should be aware of.

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.

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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.