In This Article:
Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Austar Lifesciences Limited (HKG:6118) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Austar Lifesciences
What Is Austar Lifesciences's Net Debt?
The chart below, which you can click on for greater detail, shows that Austar Lifesciences had CN¥20.0m in debt in June 2019; about the same as the year before. But it also has CN¥165.6m in cash to offset that, meaning it has CN¥145.6m net cash.
A Look At Austar Lifesciences's Liabilities
The latest balance sheet data shows that Austar Lifesciences had liabilities of CN¥590.2m due within a year, and liabilities of CN¥33.4m falling due after that. Offsetting these obligations, it had cash of CN¥165.6m as well as receivables valued at CN¥418.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥39.5m.
This state of affairs indicates that Austar Lifesciences's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥2.41b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Austar Lifesciences also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Austar Lifesciences'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.