Tonghua Dongbao Pharmaceutical (SHSE:600867) Has A Rock Solid Balance Sheet

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. Importantly, Tonghua Dongbao Pharmaceutical Co., Ltd. (SHSE:600867) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tonghua Dongbao Pharmaceutical

What Is Tonghua Dongbao Pharmaceutical's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Tonghua Dongbao Pharmaceutical had debt of CN¥230.0m, up from none in one year. But it also has CN¥1.17b in cash to offset that, meaning it has CN¥943.3m net cash.

A Look At Tonghua Dongbao Pharmaceutical's Liabilities

We can see from the most recent balance sheet that Tonghua Dongbao Pharmaceutical had liabilities of CN¥432.5m falling due within a year, and liabilities of CN¥34.5m due beyond that. Offsetting these obligations, it had cash of CN¥1.17b as well as receivables valued at CN¥924.2m due within 12 months. So it can boast CN¥1.63b more liquid assets than total liabilities.

This short term liquidity is a sign that Tonghua Dongbao Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Tonghua Dongbao Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Tonghua Dongbao Pharmaceutical has boosted its EBIT by 71%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tonghua Dongbao Pharmaceutical's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Tonghua Dongbao Pharmaceutical 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. Looking at the most recent three years, Tonghua Dongbao Pharmaceutical recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tonghua Dongbao Pharmaceutical has net cash of CN¥943.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 71% year-on-year EBIT growth. So is Tonghua Dongbao Pharmaceutical's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Tonghua Dongbao Pharmaceutical you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com