These 4 Measures Indicate That Jiangsu Sinopep-Allsino Biopharmaceutical (SHSE:688076) Is Using Debt Reasonably Well

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 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 can see that Jiangsu Sinopep-Allsino Biopharmaceutical Co., Ltd. (SHSE:688076) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jiangsu Sinopep-Allsino Biopharmaceutical

What Is Jiangsu Sinopep-Allsino Biopharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jiangsu Sinopep-Allsino Biopharmaceutical had debt of CN¥1.30b, up from CN¥488.2m in one year. However, because it has a cash reserve of CN¥661.5m, its net debt is less, at about CN¥641.9m.

How Strong Is Jiangsu Sinopep-Allsino Biopharmaceutical's Balance Sheet?

The latest balance sheet data shows that Jiangsu Sinopep-Allsino Biopharmaceutical had liabilities of CN¥1.44b due within a year, and liabilities of CN¥366.9m falling due after that. Offsetting this, it had CN¥661.5m in cash and CN¥565.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥576.5m more than its cash and near-term receivables, combined.

Since publicly traded Jiangsu Sinopep-Allsino Biopharmaceutical shares are worth a total of CN¥11.0b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Jiangsu Sinopep-Allsino Biopharmaceutical has a low net debt to EBITDA ratio of only 1.0. And its EBIT easily covers its interest expense, being 22.8 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Even more impressive was the fact that Jiangsu Sinopep-Allsino Biopharmaceutical grew its EBIT by 135% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jiangsu Sinopep-Allsino Biopharmaceutical'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Jiangsu Sinopep-Allsino Biopharmaceutical burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Jiangsu Sinopep-Allsino Biopharmaceutical's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. All these things considered, it appears that Jiangsu Sinopep-Allsino Biopharmaceutical can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. The balance sheet is clearly the area to focus on when you are analysing debt. 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 2 warning signs for Jiangsu Sinopep-Allsino Biopharmaceutical (of which 1 is a bit concerning!) 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.