These 4 Measures Indicate That Youcare Pharmaceutical Group (SHSE:688658) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Youcare Pharmaceutical Group Co., Ltd. (SHSE:688658) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Youcare Pharmaceutical Group

How Much Debt Does Youcare Pharmaceutical Group Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Youcare Pharmaceutical Group had debt of CN¥697.7m, up from CN¥423.2m in one year. But on the other hand it also has CN¥1.60b in cash, leading to a CN¥903.2m net cash position.

A Look At Youcare Pharmaceutical Group's Liabilities

The latest balance sheet data shows that Youcare Pharmaceutical Group had liabilities of CN¥1.76b due within a year, and liabilities of CN¥569.1m falling due after that. Offsetting this, it had CN¥1.60b in cash and CN¥987.1m in receivables that were due within 12 months. So it can boast CN¥256.2m more liquid assets than total liabilities.

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

In fact Youcare Pharmaceutical Group's saving grace is its low debt levels, because its EBIT has tanked 26% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Youcare Pharmaceutical Group'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Youcare Pharmaceutical Group 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, Youcare Pharmaceutical Group recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Youcare Pharmaceutical Group has CN¥903.2m in net cash and a decent-looking balance sheet. So we are not troubled with Youcare Pharmaceutical Group'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. To that end, you should be aware of the 1 warning sign we've spotted with Youcare Pharmaceutical Group .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.