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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Sinco Pharmaceuticals Holdings Limited (HKG:6833) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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¥202.2m at the end of June 2023, a reduction from CN¥332.8m over a year. But it also has CN¥520.8m in cash to offset that, meaning it has CN¥318.6m net cash.

How Strong Is Sinco Pharmaceuticals Holdings' Balance Sheet?

According to the last reported balance sheet, Sinco Pharmaceuticals Holdings had liabilities of CN¥1.01b due within 12 months, and liabilities of CN¥29.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥520.8m as well as receivables valued at CN¥341.0m due within 12 months. So it has liabilities totalling CN¥174.7m more than its cash and near-term receivables, combined.

Sinco Pharmaceuticals Holdings has a market capitalization of CN¥539.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 54% 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. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sinco Pharmaceuticals Holdings 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. Over the last three years, Sinco Pharmaceuticals Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Sinco Pharmaceuticals Holdings does have more liabilities than liquid assets, it also has net cash of CN¥318.6m. And it impressed us with free cash flow of CN¥355m, being 200% of its EBIT. So we are not troubled with Sinco Pharmaceuticals Holdings'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. For example, we've discovered 4 warning signs for Sinco Pharmaceuticals Holdings that you should be aware of before investing here.

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.