Does China Resources Sanjiu Medical & Pharmaceutical (SZSE:000999) 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.' 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. We can see that China Resources Sanjiu Medical & Pharmaceutical Co., Ltd. (SZSE:000999) does use debt in its business. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China Resources Sanjiu Medical & Pharmaceutical

What Is China Resources Sanjiu Medical & Pharmaceutical's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 China Resources Sanjiu Medical & Pharmaceutical had CN¥2.89b of debt, an increase on CN¥1.55b, over one year. But on the other hand it also has CN¥8.83b in cash, leading to a CN¥5.94b net cash position.

A Look At China Resources Sanjiu Medical & Pharmaceutical's Liabilities

The latest balance sheet data shows that China Resources Sanjiu Medical & Pharmaceutical had liabilities of CN¥12.6b due within a year, and liabilities of CN¥2.92b falling due after that. Offsetting this, it had CN¥8.83b in cash and CN¥8.88b in receivables that were due within 12 months. So it can boast CN¥2.18b more liquid assets than total liabilities.

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

Also good is that China Resources Sanjiu Medical & Pharmaceutical grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine China Resources Sanjiu Medical & Pharmaceutical'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Resources Sanjiu Medical & Pharmaceutical 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, China Resources Sanjiu Medical & Pharmaceutical produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Resources Sanjiu Medical & Pharmaceutical has CN¥5.94b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥3.9b, being 74% of its EBIT. So we don't think China Resources Sanjiu Medical & Pharmaceutical'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 instance, we've identified 1 warning sign for China Resources Sanjiu Medical & Pharmaceutical that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.