These 4 Measures Indicate That Beijing Wantai Biological Pharmacy Enterprise (SHSE:603392) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Beijing Wantai Biological Pharmacy Enterprise Co., Ltd. (SHSE:603392) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Beijing Wantai Biological Pharmacy Enterprise

What Is Beijing Wantai Biological Pharmacy Enterprise's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Beijing Wantai Biological Pharmacy Enterprise had debt of CN¥320.2m, up from CN¥268.0m in one year. However, it does have CN¥6.13b in cash offsetting this, leading to net cash of CN¥5.81b.

How Healthy Is Beijing Wantai Biological Pharmacy Enterprise's Balance Sheet?

The latest balance sheet data shows that Beijing Wantai Biological Pharmacy Enterprise had liabilities of CN¥2.38b due within a year, and liabilities of CN¥173.9m falling due after that. Offsetting this, it had CN¥6.13b in cash and CN¥2.90b in receivables that were due within 12 months. So it actually has CN¥6.47b more liquid assets than total liabilities.

This surplus suggests that Beijing Wantai Biological Pharmacy Enterprise has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Beijing Wantai Biological Pharmacy Enterprise has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Beijing Wantai Biological Pharmacy Enterprise's load is not too heavy, because its EBIT was down 100% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Beijing Wantai Biological Pharmacy Enterprise can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Beijing Wantai Biological Pharmacy Enterprise 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. Looking at the most recent three years, Beijing Wantai Biological Pharmacy Enterprise recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Wantai Biological Pharmacy Enterprise has CN¥5.81b in net cash and a decent-looking balance sheet. So we are not troubled with Beijing Wantai Biological Pharmacy Enterprise's debt use. 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 2 warning signs for Beijing Wantai Biological Pharmacy Enterprise that you should be aware of.

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.

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