Does Beijing Foyou PharmaLTD (SHSE:601089) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Beijing Foyou Pharma CO.,LTD (SHSE:601089) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing Foyou PharmaLTD

What Is Beijing Foyou PharmaLTD's Net Debt?

As you can see below, Beijing Foyou PharmaLTD had CN¥64.8m of debt at June 2024, down from CN¥74.8m a year prior. But it also has CN¥2.30b in cash to offset that, meaning it has CN¥2.24b net cash.

How Strong Is Beijing Foyou PharmaLTD's Balance Sheet?

The latest balance sheet data shows that Beijing Foyou PharmaLTD had liabilities of CN¥987.2m due within a year, and liabilities of CN¥64.5m falling due after that. On the other hand, it had cash of CN¥2.30b and CN¥418.1m worth of receivables due within a year. So it can boast CN¥1.67b more liquid assets than total liabilities.

This excess liquidity suggests that Beijing Foyou PharmaLTD is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Beijing Foyou PharmaLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Beijing Foyou PharmaLTD grew its EBIT by 8.1% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Beijing Foyou PharmaLTD will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Beijing Foyou PharmaLTD has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Beijing Foyou PharmaLTD generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Foyou PharmaLTD has net cash of CN¥2.24b, as well as more liquid assets than liabilities. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in CN¥233m. So is Beijing Foyou PharmaLTD's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Beijing Foyou PharmaLTD (1 is a bit concerning!) that you should be aware of before investing here.

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.