Tianjin Pharmaceutical Da Ren Tang Group (SHSE:600329) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited (SHSE:600329) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. 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.

See our latest analysis for Tianjin Pharmaceutical Da Ren Tang Group

What Is Tianjin Pharmaceutical Da Ren Tang Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Tianjin Pharmaceutical Da Ren Tang Group had debt of CN¥772.5m, up from CN¥111.3m in one year. But on the other hand it also has CN¥2.04b in cash, leading to a CN¥1.27b net cash position.

How Healthy Is Tianjin Pharmaceutical Da Ren Tang Group's Balance Sheet?

The latest balance sheet data shows that Tianjin Pharmaceutical Da Ren Tang Group had liabilities of CN¥3.40b due within a year, and liabilities of CN¥360.8m falling due after that. On the other hand, it had cash of CN¥2.04b and CN¥2.86b worth of receivables due within a year. So it actually has CN¥1.13b more liquid assets than total liabilities.

This short term liquidity is a sign that Tianjin Pharmaceutical Da Ren Tang Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Tianjin Pharmaceutical Da Ren Tang Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Tianjin Pharmaceutical Da Ren Tang Group has been able to increase its EBIT by 22% in twelve months, making it easier to pay down 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 Tianjin Pharmaceutical Da Ren Tang Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tianjin Pharmaceutical Da Ren Tang Group 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 most recent three years, Tianjin Pharmaceutical Da Ren Tang Group recorded free cash flow worth 69% 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 Tianjin Pharmaceutical Da Ren Tang Group has net cash of CN¥1.27b, as well as more liquid assets than liabilities. And we liked the look of last year's 22% year-on-year EBIT growth. So we don't think Tianjin Pharmaceutical Da Ren Tang Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Tianjin Pharmaceutical Da Ren Tang Group you should know about.

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.