Does Shenzhen Salubris Pharmaceuticals (SZSE:002294) 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, Shenzhen Salubris Pharmaceuticals Co., Ltd. (SZSE:002294) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for Shenzhen Salubris Pharmaceuticals

How Much Debt Does Shenzhen Salubris Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Salubris Pharmaceuticals had CN¥60.0m of debt in September 2024, down from CN¥189.6m, one year before. But it also has CN¥1.91b in cash to offset that, meaning it has CN¥1.85b net cash.

A Look At Shenzhen Salubris Pharmaceuticals' Liabilities

We can see from the most recent balance sheet that Shenzhen Salubris Pharmaceuticals had liabilities of CN¥1.01b falling due within a year, and liabilities of CN¥576.9m due beyond that. On the other hand, it had cash of CN¥1.91b and CN¥629.9m worth of receivables due within a year. So it actually has CN¥951.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Salubris Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shenzhen Salubris Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Shenzhen Salubris Pharmaceuticals has increased its EBIT by 2.6% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Salubris Pharmaceuticals'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shenzhen Salubris Pharmaceuticals 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. Over the most recent three years, Shenzhen Salubris Pharmaceuticals recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Salubris Pharmaceuticals has CN¥1.85b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥561m, being 70% of its EBIT. So is Shenzhen Salubris Pharmaceuticals'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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Shenzhen Salubris Pharmaceuticals .

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.