We Think Teyi Pharmaceutical GroupLtd (SZSE:002728) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Teyi Pharmaceutical Group Co.,Ltd (SZSE:002728) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Teyi Pharmaceutical GroupLtd

What Is Teyi Pharmaceutical GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Teyi Pharmaceutical GroupLtd had debt of CN¥296.0m at the end of March 2024, a reduction from CN¥789.4m over a year. But on the other hand it also has CN¥585.6m in cash, leading to a CN¥289.6m net cash position.

How Healthy Is Teyi Pharmaceutical GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Teyi Pharmaceutical GroupLtd had liabilities of CN¥413.6m due within 12 months and liabilities of CN¥35.4m due beyond that. On the other hand, it had cash of CN¥585.6m and CN¥150.1m worth of receivables due within a year. So it actually has CN¥286.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Teyi Pharmaceutical GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Teyi Pharmaceutical GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Teyi Pharmaceutical GroupLtd's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Teyi Pharmaceutical GroupLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Teyi Pharmaceutical GroupLtd 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. During the last three years, Teyi Pharmaceutical GroupLtd produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Teyi Pharmaceutical GroupLtd has net cash of CN¥289.6m, as well as more liquid assets than liabilities. So we are not troubled with Teyi Pharmaceutical GroupLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Teyi Pharmaceutical GroupLtd has 2 warning signs (and 1 which is a bit concerning) we think 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.