Is InnoCare Pharma (HKG:9969) A Risky Investment?

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 real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for InnoCare Pharma

What Is InnoCare Pharma's Net Debt?

As you can see below, at the end of June 2024, InnoCare Pharma had CN¥1.61b of debt, up from CN¥1.53b a year ago. Click the image for more detail. However, it does have CN¥7.30b in cash offsetting this, leading to net cash of CN¥5.69b.

How Healthy Is InnoCare Pharma's Balance Sheet?

We can see from the most recent balance sheet that InnoCare Pharma had liabilities of CN¥2.10b falling due within a year, and liabilities of CN¥637.4m due beyond that. Offsetting these obligations, it had cash of CN¥7.30b as well as receivables valued at CN¥280.9m due within 12 months. So it actually has CN¥4.84b more liquid assets than total liabilities.

This luscious liquidity implies that InnoCare Pharma's balance sheet is sturdy like a giant sequoia tree. 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! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine InnoCare Pharma's ability to maintain a healthy balance sheet going forward. 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¥781m, which is a gain of 3.1%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is InnoCare Pharma?

Statistically speaking companies that lose money are riskier than those that make money. 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¥835m of cash and made a loss of CN¥471m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥5.69b. That means it could keep spending at its current rate for more than two years. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for InnoCare Pharma that you should be aware of.

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.