These 4 Measures Indicate That Tibet Rhodiola Pharmaceutical Holding (SHSE:600211) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Tibet Rhodiola Pharmaceutical Holding Co. (SHSE:600211) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tibet Rhodiola Pharmaceutical Holding

What Is Tibet Rhodiola Pharmaceutical Holding's Debt?

As you can see below, Tibet Rhodiola Pharmaceutical Holding had CN¥528.3m of debt at September 2024, down from CN¥755.5m a year prior. However, it does have CN¥2.59b in cash offsetting this, leading to net cash of CN¥2.06b.

A Look At Tibet Rhodiola Pharmaceutical Holding's Liabilities

The latest balance sheet data shows that Tibet Rhodiola Pharmaceutical Holding had liabilities of CN¥976.4m due within a year, and liabilities of CN¥30.9m falling due after that. On the other hand, it had cash of CN¥2.59b and CN¥671.9m worth of receivables due within a year. So it can boast CN¥2.25b more liquid assets than total liabilities.

It's good to see that Tibet Rhodiola Pharmaceutical Holding has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Tibet Rhodiola Pharmaceutical Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Tibet Rhodiola Pharmaceutical Holding saw its EBIT decline by 7.6% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tibet Rhodiola Pharmaceutical Holding 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tibet Rhodiola Pharmaceutical Holding 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. During the last three years, Tibet Rhodiola Pharmaceutical Holding generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tibet Rhodiola Pharmaceutical Holding has CN¥2.06b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.0b, being 95% of its EBIT. So is Tibet Rhodiola Pharmaceutical Holding's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Tibet Rhodiola Pharmaceutical Holding you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.