Does Sino Biopharmaceutical (HKG:1177) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Sino Biopharmaceutical Limited (HKG:1177) makes use of debt. But the real question is whether this debt is making the company risky.

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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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Sino Biopharmaceutical Carry?

You can click the graphic below for the historical numbers, but it shows that Sino Biopharmaceutical had CN¥9.67b of debt in December 2024, down from CN¥12.3b, one year before. However, its balance sheet shows it holds CN¥14.6b in cash, so it actually has CN¥4.93b net cash.

How Strong Is Sino Biopharmaceutical's Balance Sheet?

According to the last reported balance sheet, Sino Biopharmaceutical had liabilities of CN¥19.6b due within 12 months, and liabilities of CN¥3.08b due beyond 12 months. Offsetting these obligations, it had cash of CN¥14.6b as well as receivables valued at CN¥5.26b due within 12 months. So it has liabilities totalling CN¥2.77b more than its cash and near-term receivables, combined.

Since publicly traded Sino Biopharmaceutical shares are worth a total of CN¥66.4b, it seems unlikely that this level of liabilities would be a major 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, Sino Biopharmaceutical also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for Sino Biopharmaceutical

But the other side of the story is that Sino Biopharmaceutical saw its EBIT decline by 5.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sino Biopharmaceutical'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sino Biopharmaceutical 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. Over the most recent three years, Sino Biopharmaceutical recorded free cash flow worth 58% 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Sino Biopharmaceutical has CN¥4.93b in net cash. So we are not troubled with Sino Biopharmaceutical's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Sino Biopharmaceutical insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying 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.