These 4 Measures Indicate That Guizhou Xinbang Pharmaceutical (SZSE:002390) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Guizhou Xinbang Pharmaceutical Co., Ltd. (SZSE:002390) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Guizhou Xinbang Pharmaceutical

How Much Debt Does Guizhou Xinbang Pharmaceutical Carry?

You can click the graphic below for the historical numbers, but it shows that Guizhou Xinbang Pharmaceutical had CN¥715.8m of debt in March 2024, down from CN¥1.43b, one year before. On the flip side, it has CN¥614.0m in cash leading to net debt of about CN¥101.8m.

How Healthy Is Guizhou Xinbang Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Guizhou Xinbang Pharmaceutical had liabilities of CN¥1.91b due within a year, and liabilities of CN¥42.4m falling due after that. Offsetting these obligations, it had cash of CN¥614.0m as well as receivables valued at CN¥3.51b due within 12 months. So it can boast CN¥2.17b more liquid assets than total liabilities.

This excess liquidity is a great indication that Guizhou Xinbang Pharmaceutical's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Carrying virtually no net debt, Guizhou Xinbang Pharmaceutical has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Guizhou Xinbang Pharmaceutical's net debt is only 0.17 times its EBITDA. And its EBIT easily covers its interest expense, being 34.6 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also positive, Guizhou Xinbang Pharmaceutical grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guizhou Xinbang Pharmaceutical's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Guizhou Xinbang Pharmaceutical actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

The good news is that Guizhou Xinbang Pharmaceutical's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! It looks Guizhou Xinbang Pharmaceutical has no trouble standing on its own two feet, and it has no reason to fear its lenders. For investing nerds like us its balance sheet is almost charming. 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 Guizhou Xinbang Pharmaceutical .

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.