These 4 Measures Indicate That Shenzhen Salubris Pharmaceuticals (SZSE:002294) Is Using Debt Safely

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.' 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. As with many other companies Shenzhen Salubris Pharmaceuticals Co., Ltd. (SZSE:002294) makes use of debt. But is this debt a concern to shareholders?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is Shenzhen Salubris Pharmaceuticals's Net Debt?

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 on the other hand it also has CN¥1.91b in cash, leading to a CN¥1.85b net cash position.

A Look At Shenzhen Salubris Pharmaceuticals' Liabilities

According to the last reported balance sheet, Shenzhen Salubris Pharmaceuticals had liabilities of CN¥1.01b due within 12 months, and liabilities of CN¥576.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.91b as well as receivables valued at CN¥629.9m due within 12 months. So it can boast 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.

Fortunately, Shenzhen Salubris Pharmaceuticals grew its EBIT by 2.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Salubris Pharmaceuticals 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. 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. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in CN¥561m. So we don't think Shenzhen Salubris Pharmaceuticals'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. Be aware that Shenzhen Salubris Pharmaceuticals is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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.