Sino Biopharmaceutical (HKG:1177) Seems To Use Debt Quite Sensibly

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 Sino Biopharmaceutical Limited (HKG:1177) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out the opportunities and risks within the HK Pharmaceuticals industry.

What Is Sino Biopharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that Sino Biopharmaceutical had debt of CN¥11.6b at the end of June 2022, a reduction from CN¥13.3b over a year. But on the other hand it also has CN¥15.7b in cash, leading to a CN¥4.06b net cash position.

A Look At Sino Biopharmaceutical's Liabilities

We can see from the most recent balance sheet that Sino Biopharmaceutical had liabilities of CN¥16.3b falling due within a year, and liabilities of CN¥9.92b due beyond that. Offsetting these obligations, it had cash of CN¥15.7b as well as receivables valued at CN¥5.35b due within 12 months. So it has liabilities totalling CN¥5.16b more than its cash and near-term receivables, combined.

Given Sino Biopharmaceutical has a market capitalization of CN¥71.6b, it's hard to believe these liabilities pose much 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!

But the other side of the story is that Sino Biopharmaceutical saw its EBIT decline by 6.0% 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 ultimately the future profitability of the business will decide if Sino Biopharmaceutical can strengthen its balance sheet over time. 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. Over the last three years, Sino Biopharmaceutical recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sino Biopharmaceutical has CN¥4.06b in net cash. And it impressed us with free cash flow of CN¥5.1b, being 80% of its EBIT. So we don't think Sino Biopharmaceutical's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Sino Biopharmaceutical's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.