InnoCare Pharma (HKG:9969) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that InnoCare Pharma Limited (HKG:9969) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

See our latest analysis for InnoCare Pharma

What Is InnoCare Pharma's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 InnoCare Pharma had debt of CN¥1.24b, up from CN¥1.15b in one year. But on the other hand it also has CN¥6.25b in cash, leading to a CN¥5.01b net cash position.

A Look At InnoCare Pharma's Liabilities

The latest balance sheet data shows that InnoCare Pharma had liabilities of CN¥329.3m due within a year, and liabilities of CN¥1.41b falling due after that. On the other hand, it had cash of CN¥6.25b and CN¥107.5m worth of receivables due within a year. So it can boast CN¥4.61b 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. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, InnoCare Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year InnoCare Pharma wasn't profitable at an EBIT level, but managed to grow its revenue by 76,369%, to CN¥1.0b. 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 the fact is that over the last twelve months InnoCare Pharma lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥11k of cash and made a loss of CN¥65m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥5.01b. 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. 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 2 warning signs for InnoCare Pharma you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.