Tibet Rhodiola Pharmaceutical Holding (SHSE:600211) Could Easily Take On More Debt

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.' 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 Tibet Rhodiola Pharmaceutical Holding Co. (SHSE:600211) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

The image below, which you can click on for greater detail, shows that at June 2024 Tibet Rhodiola Pharmaceutical Holding had debt of CN¥746.4m, up from CN¥629.1m in one year. However, its balance sheet shows it holds CN¥3.02b in cash, so it actually has CN¥2.28b net cash.

How Healthy Is Tibet Rhodiola Pharmaceutical Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tibet Rhodiola Pharmaceutical Holding had liabilities of CN¥1.48b due within 12 months and liabilities of CN¥31.7m due beyond that. On the other hand, it had cash of CN¥3.02b and CN¥894.9m worth of receivables due within a year. So it can boast CN¥2.41b more liquid assets than total liabilities.

This excess liquidity suggests that Tibet Rhodiola Pharmaceutical Holding is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Tibet Rhodiola Pharmaceutical Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Tibet Rhodiola Pharmaceutical Holding saw its EBIT decline by 4.0% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Tibet Rhodiola Pharmaceutical Holding 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. During the last three years, Tibet Rhodiola Pharmaceutical Holding generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tibet Rhodiola Pharmaceutical Holding has net cash of CN¥2.28b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.1b, being 94% of its EBIT. So is Tibet Rhodiola Pharmaceutical Holding's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Tibet Rhodiola Pharmaceutical Holding that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.