Sunshine Guojian Pharmaceutical (Shanghai) (SHSE:688336) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd (SHSE:688336) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Sunshine Guojian Pharmaceutical (Shanghai)

What Is Sunshine Guojian Pharmaceutical (Shanghai)'s Net 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 September 2024; about the same as the year before. But on the other hand it also has CN¥1.32b in cash, leading to a CN¥1.27b net cash position.

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

Zooming in on the latest balance sheet data, we can see that Sunshine Guojian Pharmaceutical (Shanghai) had liabilities of CN¥760.6m due within 12 months and liabilities of CN¥111.7m due beyond that. On the other hand, it had cash of CN¥1.32b and CN¥241.9m worth of receivables due within a year. So it can boast CN¥687.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Sunshine Guojian Pharmaceutical (Shanghai) could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sunshine Guojian Pharmaceutical (Shanghai) has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Sunshine Guojian Pharmaceutical (Shanghai) grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sunshine Guojian Pharmaceutical (Shanghai)'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. Sunshine Guojian Pharmaceutical (Shanghai) 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. In the last two years, Sunshine Guojian Pharmaceutical (Shanghai)'s free cash flow amounted to 38% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sunshine Guojian Pharmaceutical (Shanghai) has CN¥1.27b in net cash and a decent-looking balance sheet. And we liked the look of last year's 45% year-on-year EBIT growth. So is Sunshine Guojian Pharmaceutical (Shanghai)'s debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Sunshine Guojian Pharmaceutical (Shanghai) has 2 warning signs (and 1 which is significant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.