Tianjin Chase Sun PharmaceuticalLtd (SZSE:300026) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Tianjin Chase Sun Pharmaceutical Co.,Ltd (SZSE:300026) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tianjin Chase Sun PharmaceuticalLtd

What Is Tianjin Chase Sun PharmaceuticalLtd's Debt?

As you can see below, Tianjin Chase Sun PharmaceuticalLtd had CN¥803.8m of debt at September 2024, down from CN¥1.70b a year prior. However, its balance sheet shows it holds CN¥1.12b in cash, so it actually has CN¥315.5m net cash.

A Look At Tianjin Chase Sun PharmaceuticalLtd's Liabilities

We can see from the most recent balance sheet that Tianjin Chase Sun PharmaceuticalLtd had liabilities of CN¥1.67b falling due within a year, and liabilities of CN¥741.8m due beyond that. Offsetting this, it had CN¥1.12b in cash and CN¥2.99b in receivables that were due within 12 months. So it actually has CN¥1.70b more liquid assets than total liabilities.

This surplus suggests that Tianjin Chase Sun PharmaceuticalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tianjin Chase Sun PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Tianjin Chase Sun PharmaceuticalLtd's EBIT was down 77% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tianjin Chase Sun PharmaceuticalLtd 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. Tianjin Chase Sun PharmaceuticalLtd 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, Tianjin Chase Sun PharmaceuticalLtd produced sturdy free cash flow equating to 78% 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 it is always sensible to investigate a company's debt, in this case Tianjin Chase Sun PharmaceuticalLtd has CN¥315.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥738m, being 78% of its EBIT. So we are not troubled with Tianjin Chase Sun PharmaceuticalLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Tianjin Chase Sun PharmaceuticalLtd , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.