Is InnoCare Pharma (HKG:9969) Weighed On By Its Debt Load?

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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 September 2023 InnoCare Pharma had debt of CN¥328.2m, up from CN¥283.4m in one year. However, its balance sheet shows it holds CN¥8.26b in cash, so it actually has CN¥7.93b 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¥2.02b falling due within a year, and liabilities of CN¥636.4m due beyond that. Offsetting these obligations, it had cash of CN¥8.26b as well as receivables valued at CN¥190.9m due within 12 months. So it actually has CN¥5.79b 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. 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.

Over 12 months, InnoCare Pharma reported revenue of CN¥721m, which is a gain of 43%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is InnoCare Pharma?

Statistically speaking companies that lose money are riskier than those that make money. 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¥834m and booked a CN¥584m accounting loss. But the saving grace is the CN¥7.93b on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, InnoCare Pharma may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for InnoCare Pharma you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.