Pacific Shuanglin Bio-pharmacy (SZSE:000403) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Pacific Shuanglin Bio-pharmacy Co., LTD (SZSE:000403) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for Pacific Shuanglin Bio-pharmacy

What Is Pacific Shuanglin Bio-pharmacy's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Pacific Shuanglin Bio-pharmacy had debt of CN¥574.1m, up from CN¥451.3m in one year. But on the other hand it also has CN¥1.75b in cash, leading to a CN¥1.18b net cash position.

A Look At Pacific Shuanglin Bio-pharmacy's Liabilities

We can see from the most recent balance sheet that Pacific Shuanglin Bio-pharmacy had liabilities of CN¥871.5m falling due within a year, and liabilities of CN¥356.9m due beyond that. Offsetting this, it had CN¥1.75b in cash and CN¥600.7m in receivables that were due within 12 months. So it can boast CN¥1.13b more liquid assets than total liabilities.

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

On top of that, Pacific Shuanglin Bio-pharmacy grew its EBIT by 67% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Pacific Shuanglin Bio-pharmacy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Pacific Shuanglin Bio-pharmacy 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. In the last three years, Pacific Shuanglin Bio-pharmacy's free cash flow amounted to 26% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Pacific Shuanglin Bio-pharmacy has CN¥1.18b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 67% over the last year. So we don't think Pacific Shuanglin Bio-pharmacy's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Pacific Shuanglin Bio-pharmacy is showing 1 warning sign in our investment analysis , you should know about...

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.