Mayinglong Pharmaceutical Group (SHSE:600993) Has A Rock Solid Balance Sheet

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.' 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 Mayinglong Pharmaceutical Group Co., Ltd. (SHSE:600993) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Mayinglong Pharmaceutical Group

How Much Debt Does Mayinglong Pharmaceutical Group Carry?

As you can see below, Mayinglong Pharmaceutical Group had CN¥180.1m of debt at March 2024, down from CN¥462.8m a year prior. However, its balance sheet shows it holds CN¥3.03b in cash, so it actually has CN¥2.85b net cash.

How Healthy Is Mayinglong Pharmaceutical Group's Balance Sheet?

According to the last reported balance sheet, Mayinglong Pharmaceutical Group had liabilities of CN¥704.9m due within 12 months, and liabilities of CN¥263.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.03b as well as receivables valued at CN¥526.5m due within 12 months. So it can boast CN¥2.59b more liquid assets than total liabilities.

This excess liquidity suggests that Mayinglong Pharmaceutical Group is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Mayinglong Pharmaceutical Group boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Mayinglong Pharmaceutical Group has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mayinglong 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Mayinglong 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, Mayinglong Pharmaceutical Group recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Mayinglong Pharmaceutical Group has net cash of CN¥2.85b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥497m, being 91% of its EBIT. So we don't think Mayinglong Pharmaceutical Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Mayinglong Pharmaceutical Group you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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