Does China Resources Sanjiu Medical & Pharmaceutical (SZSE:000999) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, China Resources Sanjiu Medical & Pharmaceutical Co., Ltd. (SZSE:000999) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Resources Sanjiu Medical & Pharmaceutical

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

As you can see below, China Resources Sanjiu Medical & Pharmaceutical had CN¥2.61b of debt at September 2024, down from CN¥2.78b a year prior. But on the other hand it also has CN¥8.85b in cash, leading to a CN¥6.24b net cash position.

How Strong Is China Resources Sanjiu Medical & Pharmaceutical's Balance Sheet?

We can see from the most recent balance sheet that China Resources Sanjiu Medical & Pharmaceutical had liabilities of CN¥12.3b falling due within a year, and liabilities of CN¥2.42b due beyond that. Offsetting these obligations, it had cash of CN¥8.85b as well as receivables valued at CN¥8.26b due within 12 months. So it can boast CN¥2.40b more liquid assets than total liabilities.

This surplus suggests that China Resources Sanjiu Medical & Pharmaceutical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 12% over the last year, further increasing its ability to manage debt. 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 China Resources Sanjiu Medical & Pharmaceutical 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While China Resources Sanjiu Medical & Pharmaceutical 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. Over the last three years, China Resources Sanjiu Medical & Pharmaceutical recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Resources Sanjiu Medical & Pharmaceutical has net cash of CN¥6.24b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥3.6b, being 80% of its EBIT. So is China Resources Sanjiu Medical & Pharmaceutical's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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.