Here's Why Guangdong Taienkang Pharmaceutical (SZSE:301263) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Guangdong Taienkang Pharmaceutical Co., Ltd. (SZSE:301263) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Guangdong Taienkang Pharmaceutical

How Much Debt Does Guangdong Taienkang Pharmaceutical Carry?

As you can see below, at the end of March 2024, Guangdong Taienkang Pharmaceutical had CN¥210.6m of debt, up from CN¥20.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥675.8m in cash, so it actually has CN¥465.2m net cash.

A Look At Guangdong Taienkang Pharmaceutical's Liabilities

According to the last reported balance sheet, Guangdong Taienkang Pharmaceutical had liabilities of CN¥284.0m due within 12 months, and liabilities of CN¥134.2m due beyond 12 months. Offsetting this, it had CN¥675.8m in cash and CN¥402.5m in receivables that were due within 12 months. So it can boast CN¥660.1m more liquid assets than total liabilities.

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

On the other hand, Guangdong Taienkang Pharmaceutical saw its EBIT drop by 4.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Guangdong Taienkang Pharmaceutical 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 Guangdong Taienkang 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. Considering the last three years, Guangdong Taienkang Pharmaceutical actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangdong Taienkang Pharmaceutical has net cash of CN¥465.2m, as well as more liquid assets than liabilities. So we are not troubled with Guangdong Taienkang Pharmaceutical's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Guangdong Taienkang Pharmaceutical (including 1 which is potentially serious) .

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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