We Think Beijing Sun-Novo Pharmaceutical Research (SHSE:688621) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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. As with many other companies Beijing Sun-Novo Pharmaceutical Research Co., Ltd. (SHSE:688621) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Beijing Sun-Novo Pharmaceutical Research

What Is Beijing Sun-Novo Pharmaceutical Research's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Beijing Sun-Novo Pharmaceutical Research had debt of CN¥535.7m, up from CN¥241.9m in one year. But it also has CN¥749.2m in cash to offset that, meaning it has CN¥213.5m net cash.

How Healthy Is Beijing Sun-Novo Pharmaceutical Research's Balance Sheet?

The latest balance sheet data shows that Beijing Sun-Novo Pharmaceutical Research had liabilities of CN¥841.1m due within a year, and liabilities of CN¥138.4m falling due after that. On the other hand, it had cash of CN¥749.2m and CN¥653.6m worth of receivables due within a year. So it can boast CN¥423.3m more liquid assets than total liabilities.

This surplus suggests that Beijing Sun-Novo Pharmaceutical Research has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Beijing Sun-Novo Pharmaceutical Research boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Beijing Sun-Novo Pharmaceutical Research has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. 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 Beijing Sun-Novo Pharmaceutical Research can strengthen its balance sheet over time. 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. While Beijing Sun-Novo Pharmaceutical Research 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 last three years, Beijing Sun-Novo Pharmaceutical Research reported free cash flow worth 3.8% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Sun-Novo Pharmaceutical Research has net cash of CN¥213.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 27% year-on-year EBIT growth. So is Beijing Sun-Novo Pharmaceutical Research's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Beijing Sun-Novo Pharmaceutical Research, you may well want to click here to check an interactive graph of its earnings per share history.

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.