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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, China Pioneer Pharma Holdings Limited (HKG:1345) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for China Pioneer Pharma Holdings
What Is China Pioneer Pharma Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 China Pioneer Pharma Holdings had CN¥59.7m of debt, an increase on CN¥9.52m, over one year. But it also has CN¥303.0m in cash to offset that, meaning it has CN¥243.3m net cash.
A Look At China Pioneer Pharma Holdings's Liabilities
According to the last reported balance sheet, China Pioneer Pharma Holdings had liabilities of CN¥274.7m due within 12 months, and liabilities of CN¥1.82m due beyond 12 months. Offsetting these obligations, it had cash of CN¥303.0m as well as receivables valued at CN¥402.5m due within 12 months. So it actually has CN¥429.0m more liquid assets than total liabilities.
This luscious liquidity implies that China Pioneer Pharma Holdings's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that China Pioneer Pharma Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
It is just as well that China Pioneer Pharma Holdings's load is not too heavy, because its EBIT was down 65% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Pioneer Pharma Holdings will need earnings to service that debt. 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.