Does Fuan Pharmaceutical (Group) (SZSE:300194) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Fuan Pharmaceutical (Group) Co., Ltd. (SZSE:300194) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Fuan Pharmaceutical (Group)

How Much Debt Does Fuan Pharmaceutical (Group) Carry?

As you can see below, Fuan Pharmaceutical (Group) had CN¥763.4m of debt at March 2024, down from CN¥1.15b a year prior. However, it does have CN¥989.2m in cash offsetting this, leading to net cash of CN¥225.9m.

A Look At Fuan Pharmaceutical (Group)'s Liabilities

According to the last reported balance sheet, Fuan Pharmaceutical (Group) had liabilities of CN¥1.22b due within 12 months, and liabilities of CN¥524.0m due beyond 12 months. Offsetting this, it had CN¥989.2m in cash and CN¥441.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥308.0m more than its cash and near-term receivables, combined.

Given Fuan Pharmaceutical (Group) has a market capitalization of CN¥4.41b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Fuan Pharmaceutical (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Fuan Pharmaceutical (Group) grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fuan Pharmaceutical (Group) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Fuan Pharmaceutical (Group) 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, Fuan Pharmaceutical (Group) recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Fuan Pharmaceutical (Group)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥225.9m. And it impressed us with its EBIT growth of 34% over the last year. So is Fuan Pharmaceutical (Group)'s debt a risk? It doesn't seem so to us. 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 Fuan Pharmaceutical (Group) you should know about.

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.