Sichuan Huiyu Pharmaceutical (SHSE:688553) Has A Pretty Healthy Balance Sheet

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 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 Huiyu Pharmaceutical Co., Ltd. (SHSE:688553) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sichuan Huiyu Pharmaceutical

What Is Sichuan Huiyu Pharmaceutical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Sichuan Huiyu Pharmaceutical had CN¥562.3m of debt, an increase on CN¥99.6m, over one year. However, it does have CN¥2.66b in cash offsetting this, leading to net cash of CN¥2.10b.

How Healthy Is Sichuan Huiyu Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Sichuan Huiyu Pharmaceutical had liabilities of CN¥960.2m due within 12 months, and liabilities of CN¥29.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.66b as well as receivables valued at CN¥47.8m due within 12 months. So it can boast CN¥1.72b more liquid assets than total liabilities.

This surplus liquidity suggests that Sichuan Huiyu Pharmaceutical's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Sichuan Huiyu Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Sichuan Huiyu Pharmaceutical's saving grace is its low debt levels, because its EBIT has tanked 65% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sichuan Huiyu Pharmaceutical will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sichuan Huiyu Pharmaceutical 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. Over the last three years, Sichuan Huiyu Pharmaceutical saw substantial negative free cash flow, in total. 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.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sichuan Huiyu Pharmaceutical has net cash of CN¥2.10b, as well as more liquid assets than liabilities. So we are not troubled with Sichuan Huiyu Pharmaceutical's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Sichuan Huiyu Pharmaceutical (of which 1 is a bit unpleasant!) you should know about.

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.