InnoCare Pharma (HKG:9969) uses debt safely

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that InnoCare Pharma Limited (HKG:9969) uses debt in his business. But the real question is whether this debt makes the business risky.

When is debt a problem?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

See our latest analysis for InnoCare Pharma

What is InnoCare Pharma’s debt?

The image below, which you can click on for more details, shows that in December 2021, InnoCare Pharma had a debt of 1.24 billion Canadian yen, compared to 1.15 billion national yen in one year. But on the other hand, it also has 6.25 billion Canadian yen in cash, resulting in a net cash position of 5.01 billion domestic yen.

SEHK: 9969 Debt to Equity History as of April 30, 2022

A look at InnoCare Pharma’s responsibilities

The latest balance sheet data shows that InnoCare Pharma had liabilities of 329.3 million yen maturing within one year, and liabilities of 1.41 billion yen maturing thereafter. On the other hand, it had a cash position of 6.25 billion Canadian yen and 107.5 million national yen in receivables due within the year. He can therefore boast of having 4.61 billion yen more in liquid assets than total Passives.

This surplus suggests that InnoCare Pharma is using debt in a way that seems both safe and conservative. Because he has a lot of assets, he is unlikely to have any problems with his lenders. In summary, InnoCare Pharma has a net cash position, so it’s fair to say that it doesn’t have a lot of debt! The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether InnoCare Pharma 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.

Last year, InnoCare Pharma was not profitable in terms of EBIT, but managed to increase its turnover by 76,369%, to 1.0 billion yen. That’s practically the hole-in-one of revenue growth!

So how risky is InnoCare Pharma?

We have no doubt that loss-making companies are, in general, more risky than profitable companies. And the fact is that over the past twelve months, InnoCare Pharma has been losing money in earnings before interest and taxes (EBIT). Indeed, during this period, he burned 11,000 yen of cash and suffered a loss of 65 million yen. While this makes the company a bit risky, it’s important to remember that it has a net cash position of 5.01 billion Canadian yen. That means it could continue spending at its current rate for more than two years. The good news for shareholders is that InnoCare Pharma has skyrocketing revenue growth, so there is a very good chance that it can increase its free cash flow in the years to come. While unprofitable businesses can be risky, they can also grow strongly and quickly in those pre-profit years. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for InnoCare Pharma you should know.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.

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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