Is China National Accord Medicines (SZSE:000028) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that China National Accord Medicines Corporation Ltd. (SZSE:000028) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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.

See our latest analysis for China National Accord Medicines

How Much Debt Does China National Accord Medicines Carry?

The image below, which you can click on for greater detail, shows that at March 2024 China National Accord Medicines had debt of CN¥4.87b, up from CN¥4.37b in one year. However, it does have CN¥5.72b in cash offsetting this, leading to net cash of CN¥856.0m.

How Healthy Is China National Accord Medicines' Balance Sheet?

We can see from the most recent balance sheet that China National Accord Medicines had liabilities of CN¥27.7b falling due within a year, and liabilities of CN¥2.38b due beyond that. On the other hand, it had cash of CN¥5.72b and CN¥25.3b worth of receivables due within a year. So it actually has CN¥947.0m more liquid assets than total liabilities.

This short term liquidity is a sign that China National Accord Medicines could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that China National Accord Medicines 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 China National Accord Medicines saw its EBIT decline by 4.8% 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 China National Accord Medicines 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. China National Accord Medicines 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. Over the last three years, China National Accord Medicines recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case China National Accord Medicines has CN¥856.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in CN¥1.8b. So we don't think China National Accord Medicines's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for China National Accord Medicines that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.