Does Sichuan Biokin PharmaceuticalLtd (SHSE:688506) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Sichuan Biokin Pharmaceutical Co.,Ltd. (SHSE:688506) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sichuan Biokin PharmaceuticalLtd

What Is Sichuan Biokin PharmaceuticalLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Sichuan Biokin PharmaceuticalLtd had debt of CN¥1.54b, up from CN¥323.0m in one year. But on the other hand it also has CN¥4.98b in cash, leading to a CN¥3.44b net cash position.

A Look At Sichuan Biokin PharmaceuticalLtd's Liabilities

We can see from the most recent balance sheet that Sichuan Biokin PharmaceuticalLtd had liabilities of CN¥2.07b falling due within a year, and liabilities of CN¥649.9m due beyond that. Offsetting these obligations, it had cash of CN¥4.98b as well as receivables valued at CN¥117.2m due within 12 months. So it can boast CN¥2.38b more liquid assets than total liabilities.

This short term liquidity is a sign that Sichuan Biokin PharmaceuticalLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sichuan Biokin PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Sichuan Biokin PharmaceuticalLtd turned things around in the last 12 months, delivering and EBIT of CN¥4.0b. 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 Sichuan Biokin PharmaceuticalLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sichuan Biokin 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. Happily for any shareholders, Sichuan Biokin PharmaceuticalLtd actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sichuan Biokin PharmaceuticalLtd has CN¥3.44b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥4.3b, being 106% of its EBIT. So we don't think Sichuan Biokin PharmaceuticalLtd'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. For example - Sichuan Biokin PharmaceuticalLtd has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.