Does Orient Pharma (GTSM:4166) Have A Healthy Balance Sheet?

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 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 note that Orient Pharma Co., Ltd. (GTSM:4166) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Orient Pharma

What Is Orient Pharma's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Orient Pharma had NT$313.7m of debt, an increase on NT$185.5m, over one year. However, it also had NT$44.4m in cash, and so its net debt is NT$269.3m.

How Healthy Is Orient Pharma's Balance Sheet?

According to the last reported balance sheet, Orient Pharma had liabilities of NT$335.9m due within 12 months, and liabilities of NT$281.1m due beyond 12 months. Offsetting these obligations, it had cash of NT$44.4m as well as receivables valued at NT$51.9m due within 12 months. So it has liabilities totalling NT$520.6m more than its cash and near-term receivables, combined.

Given Orient Pharma has a market capitalization of NT$2.75b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Orient Pharma will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Orient Pharma wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to NT$388m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Orient Pharma's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost NT$169m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$149m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Orient Pharma (1 is a bit concerning!) that you should be aware of before investing here.

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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