Is Harbin Pharmaceutical Group (SHSE:600664) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Harbin Pharmaceutical Group Co., Ltd. (SHSE:600664) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Harbin Pharmaceutical Group

What Is Harbin Pharmaceutical Group's Net Debt?

The image below, which you can click on for greater detail, shows that Harbin Pharmaceutical Group had debt of CN¥1.80b at the end of September 2024, a reduction from CN¥1.98b over a year. However, it does have CN¥3.13b in cash offsetting this, leading to net cash of CN¥1.33b.

How Strong Is Harbin Pharmaceutical Group's Balance Sheet?

We can see from the most recent balance sheet that Harbin Pharmaceutical Group had liabilities of CN¥7.89b falling due within a year, and liabilities of CN¥432.9m due beyond that. Offsetting these obligations, it had cash of CN¥3.13b as well as receivables valued at CN¥5.28b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Harbin Pharmaceutical Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥10.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Harbin Pharmaceutical Group has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Harbin Pharmaceutical Group grew its EBIT by 18% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Harbin Pharmaceutical Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Harbin 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. During the last three years, Harbin Pharmaceutical Group generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Harbin Pharmaceutical Group has CN¥1.33b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥210m, being 88% of its EBIT. So is Harbin Pharmaceutical Group's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Harbin Pharmaceutical Group, you may well want to click here to check an interactive graph of its earnings per share history.

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.