Sichuan Biokin PharmaceuticalLtd (SHSE:688506) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Sichuan Biokin Pharmaceutical Co.,Ltd. (SHSE:688506) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Sichuan Biokin PharmaceuticalLtd

How Much Debt Does Sichuan Biokin PharmaceuticalLtd Carry?

As you can see below, at the end of March 2024, Sichuan Biokin PharmaceuticalLtd had CN¥748.8m of debt, up from CN¥479.3m a year ago. Click the image for more detail. However, it does have CN¥5.83b in cash offsetting this, leading to net cash of CN¥5.08b.

A Look At Sichuan Biokin PharmaceuticalLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Sichuan Biokin PharmaceuticalLtd had liabilities of CN¥1.62b due within 12 months and liabilities of CN¥99.9m due beyond that. Offsetting this, it had CN¥5.83b in cash and CN¥136.4m in receivables that were due within 12 months. So it actually has CN¥4.25b more liquid assets than total liabilities.

This surplus suggests that Sichuan Biokin PharmaceuticalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sichuan Biokin PharmaceuticalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Sichuan Biokin PharmaceuticalLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥4.4b in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 we empathize with investors who find debt concerning, you should keep in mind that Sichuan Biokin PharmaceuticalLtd has net cash of CN¥5.08b, as well as more liquid assets than liabilities. The cherry on top was that in converted 110% of that EBIT to free cash flow, bringing in CN¥4.9b. So is Sichuan Biokin PharmaceuticalLtd's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Sichuan Biokin PharmaceuticalLtd , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.