Does Henan Lingrui Pharmaceutical (SHSE:600285) Have A Healthy Balance Sheet?

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. Importantly, Henan Lingrui Pharmaceutical Co., Ltd. (SHSE:600285) does carry debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Henan Lingrui Pharmaceutical

What Is Henan Lingrui Pharmaceutical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Henan Lingrui Pharmaceutical had CN¥12.5m of debt in September 2024, down from CN¥101.8m, one year before. But on the other hand it also has CN¥956.8m in cash, leading to a CN¥944.3m net cash position.

How Healthy Is Henan Lingrui Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Henan Lingrui Pharmaceutical had liabilities of CN¥1.92b due within a year, and liabilities of CN¥66.0m falling due after that. Offsetting these obligations, it had cash of CN¥956.8m as well as receivables valued at CN¥838.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥188.5m.

Having regard to Henan Lingrui Pharmaceutical's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥12.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Henan Lingrui Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Henan Lingrui Pharmaceutical has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Henan Lingrui Pharmaceutical'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Henan Lingrui Pharmaceutical 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. Happily for any shareholders, Henan Lingrui Pharmaceutical actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Henan Lingrui Pharmaceutical's liabilities, but we can be reassured by the fact it has has net cash of CN¥944.3m. And it impressed us with free cash flow of CN¥611m, being 129% of its EBIT. So we don't think Henan Lingrui Pharmaceutical's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Henan Lingrui Pharmaceutical .

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.