Yixintang Pharmaceutical Group (SZSE:002727) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Yixintang Pharmaceutical Group Co., Ltd. (SZSE:002727) makes use of debt. But is this debt a concern to shareholders?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Yixintang Pharmaceutical Group Carry?

You can click the graphic below for the historical numbers, but it shows that Yixintang Pharmaceutical Group had CN¥495.5m of debt in September 2024, down from CN¥1.31b, one year before. But it also has CN¥3.24b in cash to offset that, meaning it has CN¥2.74b net cash.

A Look At Yixintang Pharmaceutical Group's Liabilities

We can see from the most recent balance sheet that Yixintang Pharmaceutical Group had liabilities of CN¥7.63b falling due within a year, and liabilities of CN¥1.63b due beyond that. Offsetting this, it had CN¥3.24b in cash and CN¥2.27b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.75b.

This deficit isn't so bad because Yixintang Pharmaceutical Group is worth CN¥7.59b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Yixintang Pharmaceutical Group boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Yixintang Pharmaceutical Group

In fact Yixintang Pharmaceutical Group's saving grace is its low debt levels, because its EBIT has tanked 62% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Yixintang Pharmaceutical Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, Yixintang Pharmaceutical Group 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

While Yixintang Pharmaceutical Group does have more liabilities than liquid assets, it also has net cash of CN¥2.74b. And it impressed us with free cash flow of CN¥1.8b, being 197% of its EBIT. So we don't have any problem with Yixintang Pharmaceutical Group's use of debt. 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 3 warning signs for Yixintang Pharmaceutical Group 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.