Is Tasly Pharmaceutical Group (SHSE:600535) 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Tasly Pharmaceutical Group Co., Ltd (SHSE:600535) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, 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 Tasly Pharmaceutical Group

How Much Debt Does Tasly Pharmaceutical Group Carry?

You can click the graphic below for the historical numbers, but it shows that Tasly Pharmaceutical Group had CN¥2.62b of debt in March 2024, down from CN¥3.31b, one year before. However, it does have CN¥4.86b in cash offsetting this, leading to net cash of CN¥2.24b.

How Strong Is Tasly Pharmaceutical Group's Balance Sheet?

The latest balance sheet data shows that Tasly Pharmaceutical Group had liabilities of CN¥2.85b due within a year, and liabilities of CN¥1.69b falling due after that. Offsetting this, it had CN¥4.86b in cash and CN¥2.78b in receivables that were due within 12 months. So it can boast CN¥3.10b more liquid assets than total liabilities.

This excess liquidity suggests that Tasly Pharmaceutical Group is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Tasly Pharmaceutical Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Tasly Pharmaceutical Group saw its EBIT drop by 2.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. Tasly Pharmaceutical Group 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, Tasly Pharmaceutical Group actually produced more free cash flow than EBIT. 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 we empathize with investors who find debt concerning, you should keep in mind that Tasly Pharmaceutical Group has net cash of CN¥2.24b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.6b, being 130% of its EBIT. So is Tasly Pharmaceutical Group's debt a risk? It doesn't seem so to us. 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. Be aware that Tasly Pharmaceutical Group is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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