Livzon Pharmaceutical Group (SZSE:000513) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Livzon Pharmaceutical Group Inc. (SZSE:000513) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Livzon Pharmaceutical Group

What Is Livzon Pharmaceutical Group's Debt?

The chart below, which you can click on for greater detail, shows that Livzon Pharmaceutical Group had CN¥4.09b in debt in September 2024; about the same as the year before. However, it does have CN¥10.8b in cash offsetting this, leading to net cash of CN¥6.72b.

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¥9.01b due within 12 months and liabilities of CN¥960.3m due beyond that. Offsetting these obligations, it had cash of CN¥10.8b as well as receivables valued at CN¥3.48b due within 12 months. So it can boast CN¥4.31b more liquid assets than total liabilities.

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

Also good is that Livzon Pharmaceutical Group grew its EBIT at 16% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Livzon Pharmaceutical Group 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Livzon Pharmaceutical Group 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. Happily for any shareholders, Livzon Pharmaceutical Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Livzon Pharmaceutical Group has CN¥6.72b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in CN¥2.7b. So is Livzon Pharmaceutical Group's debt a risk? It doesn't seem so to us. 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 - Livzon Pharmaceutical Group has 1 warning sign we think you should be aware of.

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.