Health Check: How Prudently Does InnoCare Pharma (HKG:9969) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 InnoCare Pharma

How Much Debt Does InnoCare Pharma Carry?

The image below, which you can click on for greater detail, shows that at March 2024 InnoCare Pharma had debt of CN¥343.3m, up from CN¥292.0m in one year. But it also has CN¥8.20b in cash to offset that, meaning it has CN¥7.86b net cash.

How Healthy Is InnoCare Pharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that InnoCare Pharma had liabilities of CN¥2.06b due within 12 months and liabilities of CN¥656.9m due beyond that. Offsetting these obligations, it had cash of CN¥8.20b as well as receivables valued at CN¥234.8m due within 12 months. So it actually has CN¥5.72b more liquid assets than total liabilities.

This surplus liquidity suggests that InnoCare Pharma's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, InnoCare Pharma reported revenue of CN¥715m, which is a gain of 2.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is InnoCare Pharma?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that InnoCare Pharma 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¥832m and booked a CN¥761m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥7.86b. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 2 warning signs for InnoCare Pharma that you should be aware of before investing here.

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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