Sichuan Goldstone Asia Pharmaceutical (SZSE:300434) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Sichuan Goldstone Asia Pharmaceutical Inc. (SZSE:300434) does use debt in its business. But the real question is whether this debt is making the company risky.

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, plenty of companies use debt to fund growth, without any negative consequences. 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 Sichuan Goldstone Asia Pharmaceutical

What Is Sichuan Goldstone Asia Pharmaceutical's Debt?

As you can see below, at the end of June 2024, Sichuan Goldstone Asia Pharmaceutical had CN¥25.0m of debt, up from CN¥20.0m a year ago. Click the image for more detail. However, it does have CN¥504.0m in cash offsetting this, leading to net cash of CN¥479.0m.

How Healthy Is Sichuan Goldstone Asia Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Sichuan Goldstone Asia Pharmaceutical had liabilities of CN¥320.0m due within a year, and liabilities of CN¥71.5m falling due after that. On the other hand, it had cash of CN¥504.0m and CN¥270.5m worth of receivables due within a year. So it can boast CN¥383.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Sichuan Goldstone Asia Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sichuan Goldstone Asia Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Sichuan Goldstone Asia Pharmaceutical's load is not too heavy, because its EBIT was down 72% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sichuan Goldstone Asia Pharmaceutical will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sichuan Goldstone Asia Pharmaceutical 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. In the last three years, Sichuan Goldstone Asia Pharmaceutical's free cash flow amounted to 45% of its EBIT, less 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 Sichuan Goldstone Asia Pharmaceutical has CN¥479.0m in net cash and a decent-looking balance sheet. So we are not troubled with Sichuan Goldstone Asia Pharmaceutical'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. For instance, we've identified 4 warning signs for Sichuan Goldstone Asia Pharmaceutical (1 can't be ignored) you should be aware of.

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.