Shanghai Fudan-Zhangjiang Bio-Pharmaceutical (HKG:1349) Seems To Use Debt Rather Sparingly

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 Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co., Ltd. (HKG:1349) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shanghai Fudan-Zhangjiang Bio-Pharmaceutical

What Is Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's Debt?

As you can see below, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical had CN¥100.0m of debt at September 2020, down from CN¥148.9m a year prior. However, it does have CN¥1.42b in cash offsetting this, leading to net cash of CN¥1.32b.

How Strong Is Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical had liabilities of CN¥427.9m due within 12 months, and liabilities of CN¥64.3m due beyond 12 months. Offsetting this, it had CN¥1.42b in cash and CN¥499.9m in receivables that were due within 12 months. So it actually has CN¥1.42b more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Fudan-Zhangjiang Bio-Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shanghai Fudan-Zhangjiang Bio-Pharmaceutical has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shanghai Fudan-Zhangjiang Bio-Pharmaceutical 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 last three years, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Shanghai Fudan-Zhangjiang Bio-Pharmaceutical has CN¥1.32b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥120m, being 88% of its EBIT. So we don't think Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Shanghai Fudan-Zhangjiang Bio-Pharmaceutical you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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