Is Beijing Aosaikang Pharmaceutical (SZSE:002755) A Risky Investment?

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 Beijing Aosaikang Pharmaceutical Co., Ltd. (SZSE:002755) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Beijing Aosaikang Pharmaceutical

What Is Beijing Aosaikang Pharmaceutical's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing Aosaikang Pharmaceutical had debt of CN¥92.0m, up from CN¥29.0m in one year. However, its balance sheet shows it holds CN¥2.08b in cash, so it actually has CN¥1.99b net cash.

How Strong Is Beijing Aosaikang Pharmaceutical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Aosaikang Pharmaceutical had liabilities of CN¥751.5m due within 12 months and liabilities of CN¥77.7m due beyond that. Offsetting these obligations, it had cash of CN¥2.08b as well as receivables valued at CN¥272.7m due within 12 months. So it actually has CN¥1.53b more liquid assets than total liabilities.

This surplus suggests that Beijing Aosaikang Pharmaceutical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Beijing Aosaikang Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Beijing Aosaikang Pharmaceutical turned things around in the last 12 months, delivering and EBIT of CN¥35m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Beijing Aosaikang 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Beijing Aosaikang Pharmaceutical has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Beijing Aosaikang Pharmaceutical actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Aosaikang Pharmaceutical has net cash of CN¥1.99b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥277m, being 787% of its EBIT. So we don't think Beijing Aosaikang Pharmaceutical's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for Beijing Aosaikang Pharmaceutical you should know about.

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.