Here's Why Sino Biopharmaceutical (HKG:1177) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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 Sino Biopharmaceutical Limited (HKG:1177) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sino Biopharmaceutical

What Is Sino Biopharmaceutical's Debt?

The image below, which you can click on for greater detail, shows that Sino Biopharmaceutical had debt of CN¥9.52b at the end of June 2024, a reduction from CN¥11.2b over a year. However, it does have CN¥13.2b in cash offsetting this, leading to net cash of CN¥3.66b.

How Strong Is Sino Biopharmaceutical's Balance Sheet?

According to the last reported balance sheet, Sino Biopharmaceutical had liabilities of CN¥21.9b due within 12 months, and liabilities of CN¥2.63b due beyond 12 months. On the other hand, it had cash of CN¥13.2b and CN¥7.36b worth of receivables due within a year. So it has liabilities totalling CN¥4.04b more than its cash and near-term receivables, combined.

Of course, Sino Biopharmaceutical has a market capitalization of CN¥53.5b, so these liabilities are probably manageable. 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.

Sino Biopharmaceutical's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Sino Biopharmaceutical produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. 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¥3.66b in net cash. And it impressed us with free cash flow of CN¥4.6b, being 79% of its EBIT. So we don't think Sino Biopharmaceutical's use of debt is risky. 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.