We Think Harbin Pharmaceutical Group (SHSE:600664) Can Manage Its Debt With Ease

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Harbin Pharmaceutical Group Co., Ltd. (SHSE:600664) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Harbin Pharmaceutical Group

How Much Debt Does Harbin Pharmaceutical Group Carry?

As you can see below, Harbin Pharmaceutical Group had CN¥1.98b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥2.85b in cash, so it actually has CN¥866.4m net cash.

A Look At Harbin Pharmaceutical Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Harbin Pharmaceutical Group had liabilities of CN¥8.09b due within 12 months and liabilities of CN¥439.0m due beyond that. Offsetting this, it had CN¥2.85b in cash and CN¥5.43b in receivables that were due within 12 months. So it has liabilities totalling CN¥258.3m more than its cash and near-term receivables, combined.

Given Harbin Pharmaceutical Group has a market capitalization of CN¥7.39b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Harbin Pharmaceutical Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Harbin Pharmaceutical Group grew its EBIT by 15% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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. Over the most recent three years, Harbin Pharmaceutical Group recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Harbin Pharmaceutical Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥866.4m. 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.