CSPC Pharmaceutical Group (HKG:1093) Seems To Use Debt Quite Sensibly

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. Importantly, CSPC Pharmaceutical Group Limited (HKG:1093) does carry debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

What Is CSPC Pharmaceutical Group's Debt?

As you can see below, at the end of June 2025, CSPC Pharmaceutical Group had CN¥247.5m of debt, up from CN¥202.6m a year ago. Click the image for more detail. But on the other hand it also has CN¥9.70b in cash, leading to a CN¥9.46b net cash position.

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¥10.1b falling due within a year, and liabilities of CN¥1.03b due beyond that. Offsetting this, it had CN¥9.70b in cash and CN¥9.85b in receivables that were due within 12 months. So it actually has CN¥8.42b 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!

Check out our latest analysis for CSPC Pharmaceutical Group

The modesty of its debt load may become crucial for CSPC Pharmaceutical Group if management cannot prevent a repeat of the 41% cut to EBIT over the last year. 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 it is future earnings, more than anything, that will determine CSPC Pharmaceutical Group's ability to maintain a healthy balance sheet going forward. 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 CSPC Pharmaceutical Group 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, CSPC Pharmaceutical Group recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case CSPC Pharmaceutical Group has CN¥9.46b in net cash and a decent-looking balance sheet. So we don't have any problem with CSPC Pharmaceutical Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - CSPC Pharmaceutical Group has 2 warning signs we think 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.

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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.