These 4 Measures Indicate That Shenyang Xingqi PharmaceuticalLtd (SZSE:300573) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Shenyang Xingqi Pharmaceutical Co.,Ltd. (SZSE:300573) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shenyang Xingqi PharmaceuticalLtd

What Is Shenyang Xingqi PharmaceuticalLtd's Debt?

As you can see below, at the end of September 2024, Shenyang Xingqi PharmaceuticalLtd had CN¥230.2m of debt, up from CN¥50.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥503.3m in cash, so it actually has CN¥273.1m net cash.

How Healthy Is Shenyang Xingqi PharmaceuticalLtd's Balance Sheet?

The latest balance sheet data shows that Shenyang Xingqi PharmaceuticalLtd had liabilities of CN¥483.3m due within a year, and liabilities of CN¥74.8m falling due after that. Offsetting these obligations, it had cash of CN¥503.3m as well as receivables valued at CN¥267.0m due within 12 months. So it can boast CN¥212.3m more liquid assets than total liabilities.

Having regard to Shenyang Xingqi PharmaceuticalLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥11.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Shenyang Xingqi PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Shenyang Xingqi PharmaceuticalLtd grew its EBIT by 101% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenyang Xingqi PharmaceuticalLtd 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 Shenyang Xingqi PharmaceuticalLtd 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, Shenyang Xingqi PharmaceuticalLtd recorded free cash flow of 42% of its EBIT, which is weaker 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¥273.1m in net cash and a decent-looking balance sheet. And we liked the look of last year's 101% year-on-year EBIT growth. So we don't think Shenyang Xingqi PharmaceuticalLtd's use of debt is risky. 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. Be aware that Shenyang Xingqi PharmaceuticalLtd is showing 1 warning sign in our investment analysis , 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.