These 4 Measures Indicate That Anhui Huaren Health Pharmaceutical (SZSE:301408) Is Using Debt Extensively

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.' 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. Importantly, Anhui Huaren Health Pharmaceutical Co., Ltd. (SZSE:301408) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Anhui Huaren Health Pharmaceutical

What Is Anhui Huaren Health Pharmaceutical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Anhui Huaren Health Pharmaceutical had CN¥1.09b of debt, an increase on CN¥279.7m, over one year. But it also has CN¥1.27b in cash to offset that, meaning it has CN¥186.7m net cash.

How Healthy Is Anhui Huaren Health Pharmaceutical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anhui Huaren Health Pharmaceutical had liabilities of CN¥2.15b due within 12 months and liabilities of CN¥756.6m due beyond that. On the other hand, it had cash of CN¥1.27b and CN¥634.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥993.6m.

While this might seem like a lot, it is not so bad since Anhui Huaren Health Pharmaceutical has a market capitalization of CN¥4.68b, 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, Anhui Huaren Health Pharmaceutical also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Anhui Huaren Health Pharmaceutical's load is not too heavy, because its EBIT was down 23% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Anhui Huaren Health Pharmaceutical's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Anhui Huaren Health Pharmaceutical 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. Looking at the most recent three years, Anhui Huaren Health Pharmaceutical recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Anhui Huaren Health Pharmaceutical'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¥186.7m. So although we see some areas for improvement, we're not too worried about Anhui Huaren Health Pharmaceutical's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Anhui Huaren Health Pharmaceutical (at least 1 which doesn't sit too well with us) , 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.

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