Is Sunshine Guojian Pharmaceutical (Shanghai) (SHSE:688336) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd (SHSE:688336) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Sunshine Guojian Pharmaceutical (Shanghai)

What Is Sunshine Guojian Pharmaceutical (Shanghai)'s Debt?

The chart below, which you can click on for greater detail, shows that Sunshine Guojian Pharmaceutical (Shanghai) had CN¥50.0m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds CN¥1.52b in cash, so it actually has CN¥1.47b net cash.

How Strong Is Sunshine Guojian Pharmaceutical (Shanghai)'s Balance Sheet?

The latest balance sheet data shows that Sunshine Guojian Pharmaceutical (Shanghai) had liabilities of CN¥302.9m due within a year, and liabilities of CN¥113.3m falling due after that. On the other hand, it had cash of CN¥1.52b and CN¥116.3m worth of receivables due within a year. So it can boast CN¥1.22b more liquid assets than total liabilities.

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

Even more impressive was the fact that Sunshine Guojian Pharmaceutical (Shanghai) grew its EBIT by 9,447% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sunshine Guojian Pharmaceutical (Shanghai) 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 company can only pay off debt with cold hard cash, not accounting profits. While Sunshine Guojian Pharmaceutical (Shanghai) 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. Over the most recent two years, Sunshine Guojian Pharmaceutical (Shanghai) recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Sunshine Guojian Pharmaceutical (Shanghai) has net cash of CN¥1.47b, as well as more liquid assets than liabilities. And we liked the look of last year's 9,447% year-on-year EBIT growth. So we don't think Sunshine Guojian Pharmaceutical (Shanghai)'s use of debt is risky. 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. Be aware that Sunshine Guojian Pharmaceutical (Shanghai) is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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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