Does Sinco Pharmaceuticals Holdings (HKG:6833) Have A Healthy Balance Sheet?

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. Importantly, Sinco Pharmaceuticals Holdings Limited (HKG:6833) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sinco Pharmaceuticals Holdings

What Is Sinco Pharmaceuticals Holdings's Debt?

The image below, which you can click on for greater detail, shows that Sinco Pharmaceuticals Holdings had debt of CN¥181.7m at the end of December 2022, a reduction from CN¥340.6m over a year. But on the other hand it also has CN¥329.1m in cash, leading to a CN¥147.4m net cash position.

How Healthy Is Sinco Pharmaceuticals Holdings' Balance Sheet?

We can see from the most recent balance sheet that Sinco Pharmaceuticals Holdings had liabilities of CN¥790.6m falling due within a year, and liabilities of CN¥29.9m due beyond that. Offsetting this, it had CN¥329.1m in cash and CN¥389.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥102.4m.

Since publicly traded Sinco Pharmaceuticals Holdings shares are worth a total of CN¥597.0m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sinco Pharmaceuticals Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Sinco Pharmaceuticals Holdings's saving grace is its low debt levels, because its EBIT has tanked 47% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sinco Pharmaceuticals Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sinco Pharmaceuticals Holdings 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. Happily for any shareholders, Sinco Pharmaceuticals Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Sinco Pharmaceuticals Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥147.4m. And it impressed us with free cash flow of CN¥22m, being 101% of its EBIT. So we are not troubled with Sinco Pharmaceuticals Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Sinco Pharmaceuticals Holdings is showing 3 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.