Yifeng Pharmacy Chain (SHSE:603939) Seems To Use Debt Rather Sparingly

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 note that Yifeng Pharmacy Chain Co., Ltd. (SHSE:603939) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Yifeng Pharmacy Chain

What Is Yifeng Pharmacy Chain's Net Debt?

As you can see below, at the end of March 2024, Yifeng Pharmacy Chain had CN¥3.22b of debt, up from CN¥1.60b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥6.98b in cash, so it actually has CN¥3.76b net cash.

How Healthy Is Yifeng Pharmacy Chain's Balance Sheet?

We can see from the most recent balance sheet that Yifeng Pharmacy Chain had liabilities of CN¥11.1b falling due within a year, and liabilities of CN¥4.01b due beyond that. Offsetting this, it had CN¥6.98b in cash and CN¥2.86b in receivables that were due within 12 months. So its liabilities total CN¥5.26b more than the combination of its cash and short-term receivables.

Since publicly traded Yifeng Pharmacy Chain shares are worth a total of CN¥45.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Yifeng Pharmacy Chain boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Yifeng Pharmacy Chain has increased its EBIT by 4.6% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Yifeng Pharmacy Chain's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Yifeng Pharmacy Chain actually produced more free cash flow than EBIT. 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¥3.76b. The cherry on top was that in converted 155% of that EBIT to free cash flow, bringing in CN¥3.2b. So is Yifeng Pharmacy Chain's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Yifeng Pharmacy Chain that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.