Is Shanghai Shyndec Pharmaceutical (SHSE:600420) 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.' 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. We can see that Shanghai Shyndec Pharmaceutical Co., Ltd. (SHSE:600420) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shanghai Shyndec Pharmaceutical

How Much Debt Does Shanghai Shyndec Pharmaceutical Carry?

As you can see below, Shanghai Shyndec Pharmaceutical had CN¥1.06b of debt at March 2024, down from CN¥2.57b a year prior. However, it does have CN¥6.41b in cash offsetting this, leading to net cash of CN¥5.35b.

How Healthy Is Shanghai Shyndec Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Shanghai Shyndec Pharmaceutical had liabilities of CN¥4.89b due within 12 months, and liabilities of CN¥198.6m due beyond 12 months. On the other hand, it had cash of CN¥6.41b and CN¥2.03b worth of receivables due within a year. So it can boast CN¥3.36b more liquid assets than total liabilities.

This excess liquidity suggests that Shanghai Shyndec Pharmaceutical 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, Shanghai Shyndec Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Shanghai Shyndec Pharmaceutical grew its EBIT at 15% 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 Shanghai Shyndec Pharmaceutical 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. Shanghai Shyndec 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. Over the last three years, Shanghai Shyndec Pharmaceutical actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Shyndec Pharmaceutical has CN¥5.35b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.9b, being 194% of its EBIT. So we don't think Shanghai Shyndec Pharmaceutical'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. Case in point: We've spotted 2 warning signs for Shanghai Shyndec Pharmaceutical you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.