Is YiChang HEC ChangJiang Pharmaceutical (HKG:1558) a risky investment?

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Mostly, YiChang HEC ChangJiang Pharmaceutical Co., Ltd. (HKG:1558) is in debt. But the real question is whether this debt makes the business risky.

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for YiChang HEC ChangJiang Pharmaceutical

What is YiChang HEC ChangJiang Pharmaceutical’s debt?

You can click on the graph below for historical figures, but it shows that in December 2021, YiChang HEC ChangJiang Pharmaceutical had a debt of 3.19 billion Canadian yen, an increase from 3.01 billion yen Canadians, over one year. On the other hand, he has 1.13 billion Canadian yen in cash, resulting in a net debt of approximately 2.06 billion Canadian yen.

SEHK: 1558 Debt to Equity History March 23, 2022

How healthy is YiChang HEC ChangJiang Pharmaceutical’s balance sheet?

According to the latest published balance sheet, YiChang HEC ChangJiang Pharmaceutical had liabilities of 1.24 billion Canadian yen due within 12 months and liabilities of 3.28 billion domestic yen due beyond 12 months. In return for these obligations, it had cash of 1.13 billion yen as well as receivables valued at 546.8 million yen due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 2.84 billion Canadian yen.

This is a mountain of leverage compared to its market capitalization of 3.91 trillion Canadian yen. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether YiChang HEC ChangJiang Pharmaceutical 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-year, YiChang HEC ChangJiang Pharmaceutical reported a loss in EBIT and saw its revenue drop to 914 million Canadian yen, a decline of 61%. To be honest, that doesn’t bode well.

Caveat Emptor

While YiChang HEC ChangJiang Pharmaceutical’s declining revenue is about as comforting as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was 423 million Canadian yen. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has debt. So we think its balance sheet is a little stretched, but not beyond repair. However, it doesn’t help that he burned through 1.2 billion yen in cash over the past year. So suffice it to say that we consider the stock to be very risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 1 warning sign for YiChang HEC ChangJiang Pharmaceutical which you should be aware of before investing here.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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