These 4 Measures Indicate That Yixintang Pharmaceutical Group (SZSE:002727) Is Using Debt Reasonably Well

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. As with many other companies Yixintang Pharmaceutical Group Co., Ltd. (SZSE:002727) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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, 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Yixintang Pharmaceutical Group

What Is Yixintang Pharmaceutical Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Yixintang Pharmaceutical Group had CN¥1.52b of debt, an increase on CN¥1.19b, over one year. But on the other hand it also has CN¥3.91b in cash, leading to a CN¥2.39b net cash position.

How Healthy Is Yixintang Pharmaceutical Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yixintang Pharmaceutical Group had liabilities of CN¥7.77b due within 12 months and liabilities of CN¥1.64b due beyond that. Offsetting these obligations, it had cash of CN¥3.91b as well as receivables valued at CN¥2.41b due within 12 months. So it has liabilities totalling CN¥3.10b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Yixintang Pharmaceutical Group is worth CN¥8.07b, and thus could probably raise enough capital to shore up 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. While it does have liabilities worth noting, Yixintang Pharmaceutical Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Yixintang Pharmaceutical Group's load is not too heavy, because its EBIT was down 41% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Yixintang Pharmaceutical Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Yixintang Pharmaceutical Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Yixintang Pharmaceutical Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Yixintang 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¥2.39b. The cherry on top was that in converted 168% of that EBIT to free cash flow, bringing in CN¥2.0b. So we don't have any problem with Yixintang Pharmaceutical Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Yixintang Pharmaceutical Group , and understanding them should be part of your investment process.

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.

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