Consun Pharmaceutical Group (HKG:1681) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Consun Pharmaceutical Group Limited (HKG:1681) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Consun Pharmaceutical Group

How Much Debt Does Consun Pharmaceutical Group Carry?

You can click the graphic below for the historical numbers, but it shows that Consun Pharmaceutical Group had CN¥450.5m of debt in December 2022, down from CN¥599.3m, one year before. But it also has CN¥3.04b in cash to offset that, meaning it has CN¥2.59b net cash.

A Look At Consun Pharmaceutical Group's Liabilities

We can see from the most recent balance sheet that Consun Pharmaceutical Group had liabilities of CN¥1.35b falling due within a year, and liabilities of CN¥102.9m due beyond that. On the other hand, it had cash of CN¥3.04b and CN¥295.7m worth of receivables due within a year. So it actually has CN¥1.88b more liquid assets than total liabilities.

This luscious liquidity implies that Consun Pharmaceutical Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Consun Pharmaceutical Group has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Consun Pharmaceutical Group has increased its EBIT by 8.4% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Consun Pharmaceutical Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Consun Pharmaceutical Group 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. Happily for any shareholders, Consun Pharmaceutical Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Consun Pharmaceutical Group has CN¥2.59b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in CN¥896m. When it comes to Consun Pharmaceutical Group's debt, we sufficiently relaxed that our mind turns to the jacuzzi. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Consun Pharmaceutical Group has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.