Haisco Pharmaceutical Group (SZSE:002653) Has A Pretty Healthy Balance Sheet

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. As with many other companies Haisco Pharmaceutical Group Co., Ltd. (SZSE:002653) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Haisco Pharmaceutical Group

What Is Haisco Pharmaceutical Group's Debt?

As you can see below, at the end of March 2024, Haisco Pharmaceutical Group had CN¥2.03b of debt, up from CN¥1.82b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥1.51b, its net debt is less, at about CN¥517.7m.

How Strong Is Haisco Pharmaceutical Group's Balance Sheet?

The latest balance sheet data shows that Haisco Pharmaceutical Group had liabilities of CN¥1.50b due within a year, and liabilities of CN¥1.06b falling due after that. On the other hand, it had cash of CN¥1.51b and CN¥956.5m worth of receivables due within a year. So its liabilities total CN¥93.3m more than the combination of its cash and short-term receivables.

Having regard to Haisco Pharmaceutical Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥32.9b company is short on cash, but still worth keeping an eye on the balance sheet.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (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).

Haisco Pharmaceutical Group's net debt is only 0.96 times its EBITDA. And its EBIT easily covers its interest expense, being 19.8 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Better yet, Haisco Pharmaceutical Group grew its EBIT by 118% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Haisco Pharmaceutical Group 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Haisco Pharmaceutical Group saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

The good news is that Haisco Pharmaceutical Group's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. All these things considered, it appears that Haisco Pharmaceutical Group can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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 instance, we've identified 1 warning sign for Haisco Pharmaceutical Group that you should be aware of.

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.

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