Does Shenyang Xingqi PharmaceuticalLtd (SZSE:300573) Have A Healthy Balance Sheet?

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. As with many other companies Shenyang Xingqi Pharmaceutical Co.,Ltd. (SZSE:300573) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Shenyang Xingqi PharmaceuticalLtd

How Much Debt Does Shenyang Xingqi PharmaceuticalLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Shenyang Xingqi PharmaceuticalLtd had debt of CN¥100.1m, up from none in one year. However, it does have CN¥567.9m in cash offsetting this, leading to net cash of CN¥467.8m.

A Look At Shenyang Xingqi PharmaceuticalLtd's Liabilities

The latest balance sheet data shows that Shenyang Xingqi PharmaceuticalLtd had liabilities of CN¥312.9m due within a year, and liabilities of CN¥74.0m falling due after that. On the other hand, it had cash of CN¥567.9m and CN¥223.8m worth of receivables due within a year. So it actually has CN¥404.9m more liquid assets than total liabilities.

This state of affairs indicates that Shenyang Xingqi PharmaceuticalLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥28.6b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Shenyang Xingqi PharmaceuticalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Shenyang Xingqi PharmaceuticalLtd grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shenyang Xingqi PharmaceuticalLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shenyang Xingqi 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. In the last three years, Shenyang Xingqi PharmaceuticalLtd's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenyang Xingqi PharmaceuticalLtd has CN¥467.8m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 60% over the last year. So we don't think Shenyang Xingqi PharmaceuticalLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Shenyang Xingqi PharmaceuticalLtd you should be aware of.

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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