We Think Yifeng Pharmacy Chain (SHSE:603939) Can Stay On Top Of Its 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.' 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. Importantly, Yifeng Pharmacy Chain Co., Ltd. (SHSE:603939) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Yifeng Pharmacy Chain

How Much Debt Does Yifeng Pharmacy Chain Carry?

As you can see below, at the end of September 2024, Yifeng Pharmacy Chain had CN¥3.26b of debt, up from CN¥1.53b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥8.06b in cash, so it actually has CN¥4.80b net cash.

How Healthy Is Yifeng Pharmacy Chain's Balance Sheet?

According to the last reported balance sheet, Yifeng Pharmacy Chain had liabilities of CN¥12.3b due within 12 months, and liabilities of CN¥4.02b due beyond 12 months. On the other hand, it had cash of CN¥8.06b and CN¥2.12b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.13b.

This deficit isn't so bad because Yifeng Pharmacy Chain is worth CN¥28.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Yifeng Pharmacy Chain also has more cash than debt, so we're pretty confident it can manage its debt safely.

Yifeng Pharmacy Chain's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Yifeng Pharmacy Chain 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Yifeng Pharmacy Chain 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, Yifeng Pharmacy Chain actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Yifeng Pharmacy Chain'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¥4.80b. The cherry on top was that in converted 177% of that EBIT to free cash flow, bringing in CN¥4.3b. So we don't think Yifeng Pharmacy Chain's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Yifeng Pharmacy Chain .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.