We Think CSPC Pharmaceutical Group (HKG:1093) Can Manage Its Debt With Ease

Warren Buffett famously said, '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. As with many other companies CSPC Pharmaceutical Group Limited (HKG:1093) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 CSPC Pharmaceutical Group

What Is CSPC Pharmaceutical Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 CSPC Pharmaceutical Group had CN¥682.6m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥14.0b in cash, so it actually has CN¥13.3b net cash.

How Healthy Is CSPC Pharmaceutical Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CSPC Pharmaceutical Group had liabilities of CN¥8.46b due within 12 months and liabilities of CN¥964.1m due beyond that. Offsetting these obligations, it had cash of CN¥14.0b as well as receivables valued at CN¥6.23b due within 12 months. 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!

And we also note warmly that CSPC Pharmaceutical Group grew its EBIT by 14% last year, making its debt load easier to handle. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, CSPC Pharmaceutical Group recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CSPC Pharmaceutical Group has net cash of CN¥13.3b, as well as more liquid assets than liabilities. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in CN¥4.1b. So is CSPC Pharmaceutical Group's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in CSPC Pharmaceutical Group would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.