Guizhou Sanli PharmaceuticalLtd (SHSE:603439) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Guizhou Sanli Pharmaceutical Co.,Ltd (SHSE:603439) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Guizhou Sanli PharmaceuticalLtd

What Is Guizhou Sanli PharmaceuticalLtd's Net Debt?

As you can see below, Guizhou Sanli PharmaceuticalLtd had CN¥205.0m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥594.3m in cash, leading to a CN¥389.3m net cash position.

A Look At Guizhou Sanli PharmaceuticalLtd's Liabilities

According to the last reported balance sheet, Guizhou Sanli PharmaceuticalLtd had liabilities of CN¥492.9m due within 12 months, and liabilities of CN¥59.0m due beyond 12 months. Offsetting this, it had CN¥594.3m in cash and CN¥381.2m in receivables that were due within 12 months. So it actually has CN¥423.5m more liquid assets than total liabilities.

This surplus suggests that Guizhou Sanli PharmaceuticalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guizhou Sanli PharmaceuticalLtd 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 Guizhou Sanli PharmaceuticalLtd has boosted its EBIT by 89%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Guizhou Sanli PharmaceuticalLtd 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. Guizhou Sanli PharmaceuticalLtd 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. During the last three years, Guizhou Sanli PharmaceuticalLtd produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guizhou Sanli PharmaceuticalLtd has net cash of CN¥389.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 89% over the last year. So is Guizhou Sanli PharmaceuticalLtd'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Guizhou Sanli PharmaceuticalLtd that 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.