Is China Resources Boya Bio-pharmaceutical GroupLtd (SZSE:300294) Using Too Much Debt?

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.' 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. Importantly, China Resources Boya Bio-pharmaceutical Group Co.,Ltd (SZSE:300294) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

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

What Is China Resources Boya Bio-pharmaceutical GroupLtd's Debt?

As you can see below, China Resources Boya Bio-pharmaceutical GroupLtd had CN¥22.2m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥5.32b in cash, leading to a CN¥5.30b net cash position.

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

Zooming in on the latest balance sheet data, we can see that China Resources Boya Bio-pharmaceutical GroupLtd had liabilities of CN¥456.4m due within 12 months and liabilities of CN¥51.6m due beyond that. Offsetting these obligations, it had cash of CN¥5.32b as well as receivables valued at CN¥540.3m due within 12 months. So it can boast CN¥5.36b more liquid assets than total liabilities.

This surplus strongly suggests that China Resources Boya Bio-pharmaceutical GroupLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, China Resources Boya Bio-pharmaceutical GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, China Resources Boya Bio-pharmaceutical GroupLtd grew its EBIT by 5.3% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, China Resources Boya Bio-pharmaceutical GroupLtd actually produced more free cash flow than EBIT. 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¥5.30b, as well as more liquid assets than liabilities. The cherry on top was that in converted 157% of that EBIT to free cash flow, bringing in CN¥554m. So is China Resources Boya Bio-pharmaceutical GroupLtd's debt a risk? It doesn't seem so to us. 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. Be aware that China Resources Boya Bio-pharmaceutical GroupLtd is showing 3 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.