We Think Sichuan Kelun Pharmaceutical (SZSE:002422) Can Manage Its Debt With Ease

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. As with many other companies Sichuan Kelun Pharmaceutical Co., Ltd. (SZSE:002422) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sichuan Kelun Pharmaceutical

What Is Sichuan Kelun Pharmaceutical's Net Debt?

As you can see below, Sichuan Kelun Pharmaceutical had CN¥5.16b of debt at September 2024, down from CN¥7.58b a year prior. However, its balance sheet shows it holds CN¥7.08b in cash, so it actually has CN¥1.93b net cash.

How Healthy Is Sichuan Kelun Pharmaceutical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sichuan Kelun Pharmaceutical had liabilities of CN¥10.1b due within 12 months and liabilities of CN¥2.02b due beyond that. Offsetting this, it had CN¥7.08b in cash and CN¥6.59b in receivables that were due within 12 months. So it actually has CN¥1.51b more liquid assets than total liabilities.

This short term liquidity is a sign that Sichuan Kelun Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sichuan Kelun Pharmaceutical 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 Sichuan Kelun Pharmaceutical has boosted its EBIT by 54%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sichuan Kelun Pharmaceutical 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. Sichuan Kelun Pharmaceutical 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 last three years, Sichuan Kelun Pharmaceutical recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sichuan Kelun Pharmaceutical has CN¥1.93b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥2.4b, being 89% of its EBIT. So is Sichuan Kelun Pharmaceutical's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Sichuan Kelun Pharmaceutical has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.