Is Orient Pharma (GTSM:4166) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Orient Pharma Co., Ltd. (GTSM:4166) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Orient Pharma

What Is Orient Pharma's Net Debt?

As you can see below, Orient Pharma had NT$151.9m of debt at September 2020, down from NT$244.7m a year prior. However, its balance sheet shows it holds NT$238.5m in cash, so it actually has NT$86.6m net cash.

A Look At Orient Pharma's Liabilities

We can see from the most recent balance sheet that Orient Pharma had liabilities of NT$225.9m falling due within a year, and liabilities of NT$232.7m due beyond that. Offsetting these obligations, it had cash of NT$238.5m as well as receivables valued at NT$52.9m due within 12 months. So its liabilities total NT$167.2m more than the combination of its cash and short-term receivables.

Since publicly traded Orient Pharma shares are worth a total of NT$2.77b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Orient Pharma also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Orient Pharma's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Orient Pharma wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to NT$412m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Orient Pharma?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Orient Pharma had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$145m of cash and made a loss of NT$162m. Given it only has net cash of NT$86.6m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Orient Pharma may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great 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. To that end, you should be aware of the 2 warning signs we've spotted with Orient Pharma .

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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This article by Simply Wall St is general in nature. 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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