We Think China Resources Double-Crane PharmaceuticalLtd (SHSE:600062) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, China Resources Double-Crane Pharmaceutical Co.,Ltd. (SHSE:600062) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Resources Double-Crane PharmaceuticalLtd

What Is China Resources Double-Crane PharmaceuticalLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 China Resources Double-Crane PharmaceuticalLtd had CN¥259.7m of debt, an increase on CN¥206.8m, over one year. However, it does have CN¥3.65b in cash offsetting this, leading to net cash of CN¥3.39b.

How Healthy Is China Resources Double-Crane PharmaceuticalLtd's Balance Sheet?

We can see from the most recent balance sheet that China Resources Double-Crane PharmaceuticalLtd had liabilities of CN¥3.02b falling due within a year, and liabilities of CN¥458.7m due beyond that. On the other hand, it had cash of CN¥3.65b and CN¥2.62b worth of receivables due within a year. So it can boast CN¥2.80b more liquid assets than total liabilities.

This excess liquidity suggests that China Resources Double-Crane PharmaceuticalLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, China Resources Double-Crane PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that China Resources Double-Crane PharmaceuticalLtd grew its EBIT at 17% over the last year, further increasing its ability to manage debt. 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 Resources Double-Crane PharmaceuticalLtd 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. While China Resources Double-Crane PharmaceuticalLtd 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. Over the most recent three years, China Resources Double-Crane PharmaceuticalLtd recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Resources Double-Crane PharmaceuticalLtd has net cash of CN¥3.39b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.2b, being 70% of its EBIT. So we don't think China Resources Double-Crane PharmaceuticalLtd'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. To that end, you should be aware of the 1 warning sign we've spotted with China Resources Double-Crane PharmaceuticalLtd .

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.

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