Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Ascentage International pharmaceutical group (HKG: 6855) uses debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
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What is the debt of Ascentage Pharma Group International?
As you can see below, at the end of June 2021, Ascentage Pharma Group International had a debt of CND 646.5 million, compared to CN 274.9 million a year ago. Click on the image for more details. However, his balance sheet shows that he holds CN 1.53 billion in cash, so he actually has a net cash position of CN 885.2 million.
A look at the liabilities of Ascentage Pharma Group International
Zooming in on the latest balance sheet data, we can see that Ascentage Pharma Group International had liabilities of NC 193.8 million due within 12 months and liabilities of CN 764.5 million due beyond. In compensation for these obligations, he had cash of CN 1.53 million as well as receivables valued at CN ¥ 10.3 million due within 12 months. Thus, it can boast of having more than CNN 583.7 million of liquid assets that total Liabilities.
This surplus suggests that Ascentage Pharma Group International has a prudent balance sheet and could probably eliminate its debt without too much difficulty. In short, Ascentage Pharma Group International has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt! There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Ascentage Pharma Group International can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Year over 12 months, Ascentage Pharma Group International reported CNN 23 million in revenue, a gain of 54%, although it reported no profit before interest and taxes. Hopefully the business will be able to move towards profitability.
So how risky is Ascentage Pharma Group International?
By their very nature, businesses that lose money are riskier than those with a long history of profitability. And in the past year, Ascentage Pharma Group International has recorded a loss of earnings before interest and taxes (EBIT), frankly. And in the same period, it recorded a negative free cash outflow of CNN 1.0 billion and recorded a book loss of CNN 735 million. However, he has a net cash position of CNN 885.2 million, so he has some time left before he needs more capital. With very solid revenue growth over the past year, Ascentage Pharma Group International could be on the path to profitability. Nonprofits are often risky, but they can also offer great rewards. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example – Ascentage Pharma Group International has 4 warning signs we think you should be aware.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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