Does China Resources Boya Bio-pharmaceutical GroupLtd (SZSE:300294) Have A Healthy Balance Sheet?

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. Importantly, China Resources Boya Bio-pharmaceutical Group Co.,Ltd (SZSE:300294) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for China Resources Boya Bio-pharmaceutical GroupLtd

How Much Debt Does China Resources Boya Bio-pharmaceutical GroupLtd Carry?

As you can see below, at the end of March 2024, China Resources Boya Bio-pharmaceutical GroupLtd had CN¥23.0m of debt, up from CN¥2.82m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥5.57b in cash, so it actually has CN¥5.55b net cash.

How Healthy Is China Resources Boya Bio-pharmaceutical GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that China Resources Boya Bio-pharmaceutical GroupLtd had liabilities of CN¥469.7m falling due within a year, and liabilities of CN¥50.6m due beyond that. Offsetting this, it had CN¥5.57b in cash and CN¥472.6m in receivables that were due within 12 months. So it can boast CN¥5.52b more liquid assets than total liabilities.

This excess liquidity is a great indication that China Resources Boya Bio-pharmaceutical GroupLtd's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that China Resources Boya Bio-pharmaceutical GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, China Resources Boya Bio-pharmaceutical GroupLtd saw its EBIT drop by 5.7% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if China Resources Boya Bio-pharmaceutical GroupLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While China Resources Boya Bio-pharmaceutical GroupLtd 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. Happily for any shareholders, China Resources Boya Bio-pharmaceutical GroupLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Resources Boya Bio-pharmaceutical GroupLtd has net cash of CN¥5.55b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥458m, being 152% of its EBIT. So we don't think China Resources Boya Bio-pharmaceutical GroupLtd's use of debt is risky. 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. To that end, you should be aware of the 3 warning signs we've spotted with China Resources Boya Bio-pharmaceutical GroupLtd .

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.

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