Tibet Rhodiola Pharmaceutical Holding (SHSE:600211) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Tibet Rhodiola Pharmaceutical Holding Co. (SHSE:600211) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tibet Rhodiola Pharmaceutical Holding

What Is Tibet Rhodiola Pharmaceutical Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Tibet Rhodiola Pharmaceutical Holding had CN¥761.5m of debt, an increase on CN¥540.4m, over one year. But on the other hand it also has CN¥3.08b in cash, leading to a CN¥2.32b net cash position.

A Look At Tibet Rhodiola Pharmaceutical Holding's Liabilities

The latest balance sheet data shows that Tibet Rhodiola Pharmaceutical Holding had liabilities of CN¥1.37b due within a year, and liabilities of CN¥30.3m falling due after that. On the other hand, it had cash of CN¥3.08b and CN¥677.1m worth of receivables due within a year. So it can boast CN¥2.36b more liquid assets than total liabilities.

This excess liquidity suggests that Tibet Rhodiola Pharmaceutical Holding is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face 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.

On top of that, Tibet Rhodiola Pharmaceutical Holding grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tibet Rhodiola Pharmaceutical Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 86% 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¥2.32b, as well as more liquid assets than liabilities. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in CN¥1.1b. When it comes to Tibet Rhodiola Pharmaceutical Holding's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Tibet Rhodiola Pharmaceutical Holding .

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.

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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.