CSPC Pharmaceutical Group (HKG:1093) Could Easily Take On More Debt

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.' 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 CSPC Pharmaceutical Group Limited (HKG:1093) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for CSPC Pharmaceutical Group

How Much Debt Does CSPC Pharmaceutical Group Carry?

As you can see below, at the end of June 2022, CSPC Pharmaceutical Group had CN¥396.4m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥14.0b in cash to offset that, meaning it has CN¥13.6b net cash.

A Look At CSPC Pharmaceutical Group's Liabilities

We can see from the most recent balance sheet that CSPC Pharmaceutical Group had liabilities of CN¥8.46b falling due within a year, and liabilities of CN¥964.1m due beyond that. On the other hand, it had cash of CN¥14.0b and CN¥6.23b worth of receivables due within a year. So it actually has CN¥10.8b more liquid assets than total liabilities.

This surplus suggests that CSPC Pharmaceutical Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CSPC Pharmaceutical Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that CSPC Pharmaceutical Group grew its EBIT at 10% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CSPC Pharmaceutical Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. CSPC Pharmaceutical Group 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. During the last three years, CSPC Pharmaceutical Group produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case CSPC Pharmaceutical Group has CN¥13.6b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥2.9b, being 68% of its EBIT. So we don't think CSPC Pharmaceutical Group's use of debt is risky. We'd be very excited to see if CSPC Pharmaceutical Group insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.

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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.