Is Sino Biopharmaceutical (HKG:1177) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Sino Biopharmaceutical Limited (HKG:1177) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

You can click the graphic below for the historical numbers, but it shows that Sino Biopharmaceutical had CN¥9.51b of debt in June 2024, down from CN¥11.2b, one year before. But on the other hand it also has CN¥13.2b in cash, leading to a CN¥3.67b net cash position.

A Look At Sino Biopharmaceutical's Liabilities

Zooming in on the latest balance sheet data, we can see that Sino Biopharmaceutical had liabilities of CN¥21.9b due within 12 months and liabilities of CN¥2.63b due beyond that. Offsetting these obligations, it had cash of CN¥13.2b as well as receivables valued at CN¥7.36b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.04b.

Since publicly traded Sino Biopharmaceutical shares are worth a total of CN¥55.8b, 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. Despite its noteworthy liabilities, Sino Biopharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Sino Biopharmaceutical grew its EBIT at 12% 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 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sino Biopharmaceutical 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, Sino Biopharmaceutical generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Sino Biopharmaceutical's liabilities, but we can be reassured by the fact it has has net cash of CN¥3.67b. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in CN¥5.3b. So we don't think Sino Biopharmaceutical's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Sino Biopharmaceutical .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.