Guangzhou Baiyunshan Pharmaceutical Holdings (HKG:874) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Guangzhou Baiyunshan Pharmaceutical Holdings Company Limited (HKG:874) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Guangzhou Baiyunshan Pharmaceutical Holdings

How Much Debt Does Guangzhou Baiyunshan Pharmaceutical Holdings Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Guangzhou Baiyunshan Pharmaceutical Holdings had debt of CN¥13.5b, up from CN¥11.6b in one year. But it also has CN¥17.5b in cash to offset that, meaning it has CN¥3.98b net cash.

A Look At Guangzhou Baiyunshan Pharmaceutical Holdings' Liabilities

We can see from the most recent balance sheet that Guangzhou Baiyunshan Pharmaceutical Holdings had liabilities of CN¥36.3b falling due within a year, and liabilities of CN¥4.94b due beyond that. Offsetting these obligations, it had cash of CN¥17.5b as well as receivables valued at CN¥22.0b due within 12 months. So its liabilities total CN¥1.72b more than the combination of its cash and short-term receivables.

Given Guangzhou Baiyunshan Pharmaceutical Holdings has a market capitalization of CN¥41.4b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Guangzhou Baiyunshan Pharmaceutical Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Guangzhou Baiyunshan Pharmaceutical Holdings has seen its EBIT plunge 17% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Guangzhou Baiyunshan Pharmaceutical Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Guangzhou Baiyunshan Pharmaceutical 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. Looking at the most recent three years, Guangzhou Baiyunshan Pharmaceutical Holdings recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Guangzhou Baiyunshan Pharmaceutical Holdings has CN¥3.98b in net cash. So we don't have any problem with Guangzhou Baiyunshan Pharmaceutical Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Guangzhou Baiyunshan Pharmaceutical Holdings .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.