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

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.' 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. 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?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at 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¥1.08b of debt, at September 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¥5.64b in cash, leading to a CN¥4.56b net cash position.

A Look At Shanghai Shyndec Pharmaceutical's Liabilities

We can see from the most recent balance sheet that Shanghai Shyndec Pharmaceutical had liabilities of CN¥4.62b falling due within a year, and liabilities of CN¥254.9m due beyond that. Offsetting these obligations, it had cash of CN¥5.64b as well as receivables valued at CN¥1.80b due within 12 months. So it can boast CN¥2.56b more liquid assets than total liabilities.

This surplus suggests that Shanghai Shyndec Pharmaceutical is using debt in a way that is appears to be both safe and conservative. 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!

In addition to that, we're happy to report that Shanghai Shyndec Pharmaceutical has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shanghai Shyndec Pharmaceutical 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. Happily for any shareholders, Shanghai Shyndec 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

While it is always sensible to investigate a company's debt, in this case Shanghai Shyndec Pharmaceutical has CN¥4.56b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 176% of that EBIT to free cash flow, bringing in CN¥2.0b. When it comes to Shanghai Shyndec Pharmaceutical's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. For example, we've discovered 1 warning sign for Shanghai Shyndec Pharmaceutical that you should be aware of before investing here.

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.