Here's Why Guangdong Taienkang Pharmaceutical (SZSE:301263) Has A Meaningful Debt Burden

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.' 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 Guangdong Taienkang Pharmaceutical Co., Ltd. (SZSE:301263) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Guangdong Taienkang Pharmaceutical

How Much Debt Does Guangdong Taienkang Pharmaceutical Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Guangdong Taienkang Pharmaceutical had debt of CN¥255.9m, up from CN¥64.1m in one year. However, it does have CN¥589.4m in cash offsetting this, leading to net cash of CN¥333.5m.

How Strong Is Guangdong Taienkang Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Guangdong Taienkang Pharmaceutical had liabilities of CN¥340.7m due within 12 months, and liabilities of CN¥120.4m due beyond 12 months. On the other hand, it had cash of CN¥589.4m and CN¥425.7m worth of receivables due within a year. So it actually has CN¥554.1m 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. Simply put, the fact that Guangdong Taienkang Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Guangdong Taienkang Pharmaceutical's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Guangdong Taienkang Pharmaceutical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

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¥333.5m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Guangdong Taienkang Pharmaceutical's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Guangdong Taienkang Pharmaceutical you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.