Shijiazhuang Yiling Pharmaceutical (SZSE:002603) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Shijiazhuang Yiling Pharmaceutical Co., Ltd. (SZSE:002603) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shijiazhuang Yiling Pharmaceutical

What Is Shijiazhuang Yiling Pharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that Shijiazhuang Yiling Pharmaceutical had debt of CN¥1.27b at the end of September 2024, a reduction from CN¥1.60b over a year. However, because it has a cash reserve of CN¥916.3m, its net debt is less, at about CN¥354.1m.

How Healthy Is Shijiazhuang Yiling Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Shijiazhuang Yiling Pharmaceutical had liabilities of CN¥3.94b due within a year, and liabilities of CN¥1.19b falling due after that. Offsetting this, it had CN¥916.3m in cash and CN¥3.11b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.10b more than its cash and near-term receivables, combined.

Since publicly traded Shijiazhuang Yiling Pharmaceutical shares are worth a total of CN¥26.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Shijiazhuang Yiling 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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Shijiazhuang Yiling Pharmaceutical's net debt is only 0.46 times its EBITDA. And its EBIT easily covers its interest expense, being 14.4 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. It is just as well that Shijiazhuang Yiling Pharmaceutical's load is not too heavy, because its EBIT was down 95% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shijiazhuang Yiling Pharmaceutical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Shijiazhuang Yiling Pharmaceutical produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Shijiazhuang Yiling Pharmaceutical's EBIT growth rate was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its interest cover. When we consider all the elements mentioned above, it seems to us that Shijiazhuang Yiling Pharmaceutical is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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 3 warning signs for Shijiazhuang Yiling Pharmaceutical (of which 1 can't be ignored!) 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.