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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 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 Pharmesis International Ltd. (SGX:BFK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Pharmesis International
What Is Pharmesis International's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Pharmesis International had CN¥15.0m of debt, an increase on CN¥15.0, over one year. However, its balance sheet shows it holds CN¥15.1m in cash, so it actually has CN¥108.0k net cash.
A Look At Pharmesis International's Liabilities
The latest balance sheet data shows that Pharmesis International had liabilities of CN¥23.8m due within a year, and liabilities of CN¥944.0k falling due after that. Offsetting this, it had CN¥15.1m in cash and CN¥25.5m in receivables that were due within 12 months. So it actually has CN¥15.9m more liquid assets than total liabilities.
This surplus strongly suggests that Pharmesis International has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Pharmesis International has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Pharmesis International'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.