Is Shenzhen Salubris Pharmaceuticals (SZSE:002294) A Risky Investment?

Warren Buffett famously said, '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 note that Shenzhen Salubris Pharmaceuticals Co., Ltd. (SZSE:002294) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 as of September 2023 Shenzhen Salubris Pharmaceuticals had CN¥204.2m of debt, an increase on CN¥160.1m, over one year. However, its balance sheet shows it holds CN¥2.01b in cash, so it actually has CN¥1.80b net cash.

How Strong Is Shenzhen Salubris Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Salubris Pharmaceuticals had liabilities of CN¥934.7m falling due within a year, and liabilities of CN¥549.7m due beyond that. On the other hand, it had cash of CN¥2.01b and CN¥603.6m worth of receivables due within a year. So it actually has CN¥1.13b 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. Succinctly put, Shenzhen Salubris Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Shenzhen Salubris Pharmaceuticals grew its EBIT by 8.3% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Shenzhen Salubris Pharmaceuticals produced sturdy free cash flow equating to 72% 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 Shenzhen Salubris Pharmaceuticals has CN¥1.80b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in CN¥121m. 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. We've identified 1 warning sign with Shenzhen Salubris Pharmaceuticals , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.