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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited (SHSE:600329) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tianjin Pharmaceutical Da Ren Tang Group

How Much Debt Does Tianjin Pharmaceutical Da Ren Tang Group Carry?

As you can see below, Tianjin Pharmaceutical Da Ren Tang Group had CN¥625.9m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥2.46b in cash, leading to a CN¥1.83b net cash position.

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

Zooming in on the latest balance sheet data, we can see that Tianjin Pharmaceutical Da Ren Tang Group had liabilities of CN¥3.67b due within 12 months and liabilities of CN¥351.0m due beyond that. On the other hand, it had cash of CN¥2.46b and CN¥3.33b worth of receivables due within a year. So it actually has CN¥1.76b more liquid assets than total liabilities.

This surplus suggests that Tianjin Pharmaceutical Da Ren Tang Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tianjin Pharmaceutical Da Ren Tang Group boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Tianjin Pharmaceutical Da Ren Tang Group saw its EBIT decline by 2.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tianjin Pharmaceutical Da Ren Tang Group 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. During the last three years, Tianjin Pharmaceutical Da Ren Tang Group produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tianjin Pharmaceutical Da Ren Tang Group has CN¥1.83b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in CN¥302m. So we don't think Tianjin Pharmaceutical Da Ren Tang Group'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. For instance, we've identified 1 warning sign for Tianjin Pharmaceutical Da Ren Tang Group that you should be aware of.

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