Is Shanghai Shyndec Pharmaceutical (SHSE:600420) Using Too Much Debt?

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 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. As with many other companies Shanghai Shyndec Pharmaceutical Co., Ltd. (SHSE:600420) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Shanghai Shyndec Pharmaceutical

What Is Shanghai Shyndec Pharmaceutical's Net Debt?

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, its balance sheet shows it holds CN¥6.41b in cash, so it actually has CN¥5.35b net cash.

How Healthy Is Shanghai Shyndec Pharmaceutical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Shyndec Pharmaceutical had liabilities of CN¥4.89b due within 12 months and liabilities of CN¥198.6m due beyond that. Offsetting these obligations, it had cash of CN¥6.41b as well as receivables valued at CN¥2.03b due within 12 months. So it can boast CN¥3.36b more liquid assets than total liabilities.

It's good to see that Shanghai Shyndec Pharmaceutical has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Shanghai Shyndec Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Shanghai Shyndec Pharmaceutical grew its EBIT at 14% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shanghai Shyndec Pharmaceutical's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Happily for any shareholders, Shanghai Shyndec Pharmaceutical actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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. The cherry on top was that in converted 192% of that EBIT to free cash flow, bringing in CN¥1.9b. So is Shanghai Shyndec Pharmaceutical's debt a risk? It doesn't seem so to us. 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 Shanghai Shyndec 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.