Is Charmacy Pharmaceutical (HKG:2289) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Charmacy Pharmaceutical Co., Ltd. (HKG:2289) does use debt in its business. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Charmacy Pharmaceutical's Debt?

The image below, which you can click on for greater detail, shows that at June 2025 Charmacy Pharmaceutical had debt of CN¥1.17b, up from CN¥948.8m in one year. On the flip side, it has CN¥521.2m in cash leading to net debt of about CN¥652.4m.

How Strong Is Charmacy Pharmaceutical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Charmacy Pharmaceutical had liabilities of CN¥2.83b due within 12 months and liabilities of CN¥74.0m due beyond that. Offsetting these obligations, it had cash of CN¥521.2m as well as receivables valued at CN¥1.29b due within 12 months. So it has liabilities totalling CN¥1.09b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥501.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Charmacy Pharmaceutical would probably need a major re-capitalization if its creditors were to demand repayment.

Check out our latest analysis for Charmacy Pharmaceutical

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While we wouldn't worry about Charmacy Pharmaceutical's net debt to EBITDA ratio of 4.3, we think its super-low interest cover of 2.3 times is a sign of high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Notably, Charmacy Pharmaceutical's EBIT was pretty flat over the last year, which isn't ideal given the debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Charmacy Pharmaceutical will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Considering the last three years, Charmacy Pharmaceutical actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

We'd go so far as to say Charmacy Pharmaceutical's level of total liabilities was disappointing. Having said that, its ability to grow its EBIT isn't such a worry. It's also worth noting that Charmacy Pharmaceutical is in the Healthcare industry, which is often considered to be quite defensive. Taking into account all the aforementioned factors, it looks like Charmacy Pharmaceutical has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Charmacy Pharmaceutical (1 is a bit unpleasant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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