Does Tibet Cheezheng Tibetan Medicine (SZSE:002287) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Tibet Cheezheng Tibetan Medicine Co., Ltd. (SZSE:002287) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tibet Cheezheng Tibetan Medicine

How Much Debt Does Tibet Cheezheng Tibetan Medicine Carry?

You can click the graphic below for the historical numbers, but it shows that Tibet Cheezheng Tibetan Medicine had CN¥1.85b of debt in June 2024, down from CN¥2.06b, one year before. However, its balance sheet shows it holds CN¥3.04b in cash, so it actually has CN¥1.19b net cash.

A Look At Tibet Cheezheng Tibetan Medicine's Liabilities

The latest balance sheet data shows that Tibet Cheezheng Tibetan Medicine had liabilities of CN¥1.66b due within a year, and liabilities of CN¥1.24b falling due after that. Offsetting these obligations, it had cash of CN¥3.04b as well as receivables valued at CN¥863.5m due within 12 months. So it actually has CN¥1.00b more liquid assets than total liabilities.

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

We saw Tibet Cheezheng Tibetan Medicine grow its EBIT by 4.7% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tibet Cheezheng Tibetan Medicine will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Tibet Cheezheng Tibetan Medicine 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. In the last three years, Tibet Cheezheng Tibetan Medicine's free cash flow amounted to 50% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tibet Cheezheng Tibetan Medicine has CN¥1.19b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 4.7% in the last twelve months. So we don't have any problem with Tibet Cheezheng Tibetan Medicine's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Tibet Cheezheng Tibetan Medicine has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.