Does DaShenLin Pharmaceutical Group (SHSE:603233) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that DaShenLin Pharmaceutical Group Co., Ltd. (SHSE:603233) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for DaShenLin Pharmaceutical Group

What Is DaShenLin Pharmaceutical Group's Net Debt?

As you can see below, at the end of March 2024, DaShenLin Pharmaceutical Group had CN¥3.83b of debt, up from CN¥3.18b a year ago. Click the image for more detail. But it also has CN¥5.40b in cash to offset that, meaning it has CN¥1.57b net cash.

How Healthy Is DaShenLin Pharmaceutical Group's Balance Sheet?

According to the last reported balance sheet, DaShenLin Pharmaceutical Group had liabilities of CN¥12.1b due within 12 months, and liabilities of CN¥4.79b due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.40b as well as receivables valued at CN¥1.62b due within 12 months. So its liabilities total CN¥9.89b more than the combination of its cash and short-term receivables.

DaShenLin Pharmaceutical Group has a market capitalization of CN¥22.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, DaShenLin Pharmaceutical Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, DaShenLin Pharmaceutical Group saw its EBIT drop by 5.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine DaShenLin Pharmaceutical Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. DaShenLin Pharmaceutical Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, DaShenLin Pharmaceutical Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although DaShenLin Pharmaceutical Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.57b. And it impressed us with free cash flow of CN¥2.0b, being 107% of its EBIT. So we don't have any problem with DaShenLin Pharmaceutical Group's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that DaShenLin Pharmaceutical Group is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.