We Think Pacific Shuanglin Bio-pharmacy (SZSE:000403) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Pacific Shuanglin Bio-pharmacy Co., LTD (SZSE:000403) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, 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.

View our latest analysis for Pacific Shuanglin Bio-pharmacy

What Is Pacific Shuanglin Bio-pharmacy's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Pacific Shuanglin Bio-pharmacy had debt of CN¥528.2m, up from CN¥370.7m in one year. But it also has CN¥1.76b in cash to offset that, meaning it has CN¥1.23b net cash.

How Healthy Is Pacific Shuanglin Bio-pharmacy's Balance Sheet?

We can see from the most recent balance sheet that Pacific Shuanglin Bio-pharmacy had liabilities of CN¥859.1m falling due within a year, and liabilities of CN¥314.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.76b as well as receivables valued at CN¥529.1m due within 12 months. So it actually has CN¥1.12b more liquid assets than total liabilities.

This short term liquidity is a sign that Pacific Shuanglin Bio-pharmacy could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Pacific Shuanglin Bio-pharmacy boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Pacific Shuanglin Bio-pharmacy has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. 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 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Pacific Shuanglin Bio-pharmacy 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. In the last three years, Pacific Shuanglin Bio-pharmacy's free cash flow amounted to 23% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Pacific Shuanglin Bio-pharmacy has net cash of CN¥1.23b, as well as more liquid assets than liabilities. And we liked the look of last year's 35% year-on-year EBIT growth. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Pacific Shuanglin Bio-pharmacy that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com