Here's Why GuangYuYuan Chinese Herbal Medicine (SHSE:600771) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that GuangYuYuan Chinese Herbal Medicine Co., Ltd. (SHSE:600771) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for GuangYuYuan Chinese Herbal Medicine

What Is GuangYuYuan Chinese Herbal Medicine's Debt?

You can click the graphic below for the historical numbers, but it shows that GuangYuYuan Chinese Herbal Medicine had CN¥251.9m of debt in March 2024, down from CN¥410.8m, one year before. But it also has CN¥385.2m in cash to offset that, meaning it has CN¥133.3m net cash.

A Look At GuangYuYuan Chinese Herbal Medicine's Liabilities

The latest balance sheet data shows that GuangYuYuan Chinese Herbal Medicine had liabilities of CN¥968.5m due within a year, and liabilities of CN¥79.7m falling due after that. Offsetting this, it had CN¥385.2m in cash and CN¥716.7m in receivables that were due within 12 months. So it can boast CN¥53.8m more liquid assets than total liabilities.

Having regard to GuangYuYuan Chinese Herbal Medicine's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥11.5b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that GuangYuYuan Chinese Herbal Medicine has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, GuangYuYuan Chinese Herbal Medicine turned things around in the last 12 months, delivering and EBIT of CN¥140m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is GuangYuYuan Chinese Herbal Medicine's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. GuangYuYuan Chinese Herbal Medicine 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 year, GuangYuYuan Chinese Herbal Medicine actually produced more free cash flow than EBIT. 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 GuangYuYuan Chinese Herbal Medicine has net cash of CN¥133.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥207m, being 147% of its EBIT. So we don't think GuangYuYuan Chinese Herbal Medicine's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for GuangYuYuan Chinese Herbal Medicine 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.