Does Livzon Pharmaceutical Group (SZSE:000513) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Livzon Pharmaceutical Group Inc. (SZSE:000513) does use debt in its business. But the real question is whether this debt is making the company risky.

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Livzon Pharmaceutical Group

What Is Livzon Pharmaceutical Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Livzon Pharmaceutical Group had CN¥4.12b of debt, an increase on CN¥3.60b, over one year. But it also has CN¥11.4b in cash to offset that, meaning it has CN¥7.29b net cash.

How Healthy Is Livzon Pharmaceutical Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Livzon Pharmaceutical Group had liabilities of CN¥8.09b due within 12 months and liabilities of CN¥2.19b due beyond that. Offsetting these obligations, it had cash of CN¥11.4b as well as receivables valued at CN¥3.63b due within 12 months. So it can boast CN¥4.76b more liquid assets than total liabilities.

This surplus suggests that Livzon Pharmaceutical Group is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Livzon Pharmaceutical Group has more cash than debt is arguably a good indication that it can manage its debt safely.

While Livzon Pharmaceutical Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Livzon Pharmaceutical Group's ability to maintain a healthy balance sheet going forward. 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. Livzon 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. During the last three years, Livzon Pharmaceutical Group generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Livzon Pharmaceutical Group has net cash of CN¥7.29b, as well as more liquid assets than liabilities. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥2.4b. So is Livzon Pharmaceutical Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Livzon Pharmaceutical Group that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.