Beijing Konruns PharmaceuticalLtd (SHSE:603590) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Beijing Konruns Pharmaceutical Co.,Ltd. (SHSE:603590) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Beijing Konruns PharmaceuticalLtd

What Is Beijing Konruns PharmaceuticalLtd's Debt?

As you can see below, at the end of September 2024, Beijing Konruns PharmaceuticalLtd had CN¥204.7m of debt, up from CN¥134.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥640.3m in cash, so it actually has CN¥435.6m net cash.

How Healthy Is Beijing Konruns PharmaceuticalLtd's Balance Sheet?

According to the last reported balance sheet, Beijing Konruns PharmaceuticalLtd had liabilities of CN¥319.5m due within 12 months, and liabilities of CN¥159.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥640.3m as well as receivables valued at CN¥329.3m due within 12 months. So it can boast CN¥490.9m more liquid assets than total liabilities.

This surplus suggests that Beijing Konruns PharmaceuticalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Beijing Konruns PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Beijing Konruns PharmaceuticalLtd's load is not too heavy, because its EBIT was down 57% 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 it is future earnings, more than anything, that will determine Beijing Konruns PharmaceuticalLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Beijing Konruns PharmaceuticalLtd 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. In the last three years, Beijing Konruns PharmaceuticalLtd's free cash flow amounted to 49% of its EBIT, less 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 Konruns PharmaceuticalLtd has CN¥435.6m in net cash and a decent-looking balance sheet. So we are not troubled with Beijing Konruns PharmaceuticalLtd's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Beijing Konruns PharmaceuticalLtd you should know about.

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.