These 4 Measures Indicate That Tianjin Lisheng PharmaceuticalLtd (SZSE:002393) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Tianjin Lisheng Pharmaceutical Co.,Ltd. (SZSE:002393) does carry debt. But should shareholders be worried about its use of debt?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tianjin Lisheng PharmaceuticalLtd

What Is Tianjin Lisheng PharmaceuticalLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Tianjin Lisheng PharmaceuticalLtd had debt of CN¥60.9m, up from CN¥54.9m in one year. However, it does have CN¥2.10b in cash offsetting this, leading to net cash of CN¥2.04b.

A Look At Tianjin Lisheng PharmaceuticalLtd's Liabilities

We can see from the most recent balance sheet that Tianjin Lisheng PharmaceuticalLtd had liabilities of CN¥856.1m falling due within a year, and liabilities of CN¥260.9m due beyond that. Offsetting this, it had CN¥2.10b in cash and CN¥444.5m in receivables that were due within 12 months. So it actually has CN¥1.43b more liquid assets than total liabilities.

This excess liquidity is a great indication that Tianjin Lisheng PharmaceuticalLtd's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Tianjin Lisheng PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Tianjin Lisheng PharmaceuticalLtd has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tianjin Lisheng PharmaceuticalLtd will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tianjin Lisheng PharmaceuticalLtd 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. Happily for any shareholders, Tianjin Lisheng PharmaceuticalLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tianjin Lisheng PharmaceuticalLtd has CN¥2.04b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 242% of that EBIT to free cash flow, bringing in CN¥123m. When it comes to Tianjin Lisheng PharmaceuticalLtd's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Tianjin Lisheng PharmaceuticalLtd you should know about.

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.