We Think DaShenLin Pharmaceutical Group (SHSE:603233) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 DaShenLin Pharmaceutical Group Co., Ltd. (SHSE:603233) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for DaShenLin Pharmaceutical Group

How Much Debt Does DaShenLin Pharmaceutical Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 DaShenLin Pharmaceutical Group had CN¥4.54b of debt, an increase on CN¥2.92b, over one year. However, its balance sheet shows it holds CN¥5.72b in cash, so it actually has CN¥1.19b net cash.

A Look At DaShenLin Pharmaceutical Group's Liabilities

We can see from the most recent balance sheet that DaShenLin Pharmaceutical Group had liabilities of CN¥13.2b falling due within a year, and liabilities of CN¥4.60b due beyond that. On the other hand, it had cash of CN¥5.72b and CN¥1.68b worth of receivables due within a year. So it has liabilities totalling CN¥10.3b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since DaShenLin Pharmaceutical Group has a market capitalization of CN¥17.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, DaShenLin Pharmaceutical Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for DaShenLin Pharmaceutical Group if management cannot prevent a repeat of the 30% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if DaShenLin Pharmaceutical Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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

While DaShenLin Pharmaceutical Group does have more liabilities than liquid assets, it also has net cash of CN¥1.19b. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in CN¥1.5b. So we are not troubled with DaShenLin Pharmaceutical Group's debt use. 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. Case in point: We've spotted 2 warning signs for DaShenLin Pharmaceutical Group you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.