Does Tasly Pharmaceutical Group (SHSE:600535) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 Tasly Pharmaceutical Group Co., Ltd (SHSE:600535) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tasly Pharmaceutical Group

What Is Tasly Pharmaceutical Group's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Tasly Pharmaceutical Group had debt of CN¥3.38b, up from CN¥2.19b in one year. However, its balance sheet shows it holds CN¥4.38b in cash, so it actually has CN¥1.01b net cash.

A Look At Tasly Pharmaceutical Group's Liabilities

We can see from the most recent balance sheet that Tasly Pharmaceutical Group had liabilities of CN¥2.99b falling due within a year, and liabilities of CN¥1.96b due beyond that. Offsetting this, it had CN¥4.38b in cash and CN¥3.23b in receivables that were due within 12 months. So it actually has CN¥2.65b more liquid assets than total liabilities.

This surplus suggests that Tasly Pharmaceutical Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Tasly Pharmaceutical Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Tasly Pharmaceutical Group has boosted its EBIT by 55%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tasly Pharmaceutical 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Tasly Pharmaceutical 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. Happily for any shareholders, Tasly Pharmaceutical Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tasly Pharmaceutical Group has net cash of CN¥1.01b, as well as more liquid assets than liabilities. The cherry on top was that in converted 149% of that EBIT to free cash flow, bringing in CN¥1.8b. So we don't think Tasly Pharmaceutical Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Tasly Pharmaceutical Group that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.