Stock Analysis

Would Sinphar PharmaceuticalLtd (TPE:1734) Be Better Off With Less Debt?

TWSE:1734
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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 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 Sinphar Pharmaceutical Co.,Ltd. (TPE:1734) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sinphar PharmaceuticalLtd

How Much Debt Does Sinphar PharmaceuticalLtd Carry?

As you can see below, at the end of September 2020, Sinphar PharmaceuticalLtd had NT$2.21b of debt, up from NT$2.01b a year ago. Click the image for more detail. However, it also had NT$1.14b in cash, and so its net debt is NT$1.08b.

debt-equity-history-analysis
TSEC:1734 Debt to Equity History February 15th 2021

How Healthy Is Sinphar PharmaceuticalLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sinphar PharmaceuticalLtd had liabilities of NT$1.36b due within 12 months and liabilities of NT$1.67b due beyond that. On the other hand, it had cash of NT$1.14b and NT$561.8m worth of receivables due within a year. So it has liabilities totalling NT$1.33b more than its cash and near-term receivables, combined.

Sinphar PharmaceuticalLtd has a market capitalization of NT$4.60b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Sinphar PharmaceuticalLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sinphar PharmaceuticalLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 8.5%, to NT$2.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Sinphar PharmaceuticalLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$34m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$146m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Sinphar PharmaceuticalLtd has 2 warning signs (and 1 which makes us a bit uncomfortable) we think 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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