These 4 Measures Indicate That Tianjin Chase Sun PharmaceuticalLtd (SZSE:300026) Is Using Debt Reasonably Well

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 Tianjin Chase Sun Pharmaceutical Co.,Ltd (SZSE:300026) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Tianjin Chase Sun PharmaceuticalLtd

What Is Tianjin Chase Sun PharmaceuticalLtd's Net Debt?

As you can see below, Tianjin Chase Sun PharmaceuticalLtd had CN¥1.48b of debt at March 2024, down from CN¥1.85b a year prior. But on the other hand it also has CN¥1.62b in cash, leading to a CN¥142.2m net cash position.

A Look At Tianjin Chase Sun PharmaceuticalLtd's Liabilities

According to the last reported balance sheet, Tianjin Chase Sun PharmaceuticalLtd had liabilities of CN¥1.66b due within 12 months, and liabilities of CN¥1.43b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.62b as well as receivables valued at CN¥3.06b due within 12 months. So it can boast CN¥1.59b more liquid assets than total liabilities.

It's good to see that Tianjin Chase Sun PharmaceuticalLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Tianjin Chase Sun PharmaceuticalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Tianjin Chase Sun PharmaceuticalLtd if management cannot prevent a repeat of the 42% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tianjin Chase Sun PharmaceuticalLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tianjin Chase Sun PharmaceuticalLtd 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. Looking at the most recent three years, Tianjin Chase Sun PharmaceuticalLtd recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tianjin Chase Sun PharmaceuticalLtd has CN¥142.2m in net cash and a decent-looking balance sheet. So we are not troubled with Tianjin Chase Sun PharmaceuticalLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Tianjin Chase Sun PharmaceuticalLtd , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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