Is Shanghai Henlius Biotech (HKG:2696) Using Too Much Debt?

David Iben put it well when he said: “Volatility is not a risk that we care about. Our aim is to avoid a permanent loss of capital.’ So it might be obvious that you need to consider debt when considering how risky a particular stock is, because too much debt can send a company into the abyss. Important, Shanghai Henlius Biotech, Inc. (HKG:2696) is in debt. But the real question is whether that debt makes the company risky.

What is the risk of debt?

Debt and other liabilities become risky for a company when it cannot easily meet those obligations, either through free cash flow or by raising capital at an attractive rate. An integral part of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. A more common (but still costly) case, however, is when a company has to issue stock at bargain prices, which permanently dilutes shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive ones. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.

Check out our latest analysis for Shanghai Henlius Biotech

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What debt does Shanghai Henlius Biotech have?

The image below, which you can click for more details, shows that Shanghai Henlius Biotech had CN¥3.27 billion in debt as of June 2022, up from CN¥2.30 billion in one year. However, it also had CN¥794.7 million in cash, making its net debt CN¥2.48 billion.

Debt Equity History Analysis
SEHK:2696 Debt to Equity History 22 September 2022

A look at the liabilities of Shanghai Henlius Biotech

If we take a closer look at the latest balance sheet data, we can see that Shanghai Henlius Biotech had CN¥4.23 billion in debt maturing within 12 months and CN¥1.88 billion in debt that were due in addition. On the other hand, it had CN¥794.7 million in cash and CN¥554.0 million in receivables due within one year. So its liabilities are CN¥4.76 billion more than the combination of cash and short-term receivables.

This deficit is significant relative to its market cap of CN¥6.59 billion, suggesting that shareholders should keep an eye on Shanghai Henlius Biotech’s use of debt. Should lenders demand that they shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when analyzing debt. But it’s future earnings that will determine Shanghai Henlius Biotech’s ability to maintain a healthy balance sheet well into the future. So if you focus on the future, you can check this free Analyst earnings forecast report.

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Last year, Shanghai Henlius Biotech was not profitable at the EBIT level, but managed to grow its sales by 111% to CN¥2.3 billion. So its fairly obvious shareholders are hoping for more growth!

caveat emptor

Despite sales growth, Shanghai Henlius Biotech still posted earnings before interest and taxes (EBIT) last year. More specifically, the EBIT loss amounted to CN¥ 401 million. If we look at this and remember the liabilities on its balance sheet relative to cash, it seems unwise for the company to have debt. As such, we think his record is a bit stretched, albeit not beyond repair. It doesn’t help, however, that it burned CN¥1.0 billion in cash last year. In short, it’s a really risky stock. Undoubtedly, we learn most about debt from the balance sheet. But ultimately, any business can have off-balance-sheet risks. You should be aware of this 2 warning signs we have sighted with Shanghai Henlius Biotech.

At the end of the day, it’s often better to focus on companies that are free of net debt. You can access our dedicated list of such companies (all with a track record of earnings growth). It’s free.

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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

The assessment is complex, but we help to simplify it.

find out if Shanghai Henlius Biotech may be over or under priced by reviewing our comprehensive analysis which includes the following Fair Value Estimates, Risks and Warnings, Dividends, Insider Trading and Financial Health.

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