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 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. We can see that Consun Pharmaceutical Group Limited (HKG:1681) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Consun Pharmaceutical Group

What Is Consun Pharmaceutical Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Consun Pharmaceutical Group had CN¥503.4m of debt, an increase on CN¥450.5m, over one year. However, it does have CN¥3.58b in cash offsetting this, leading to net cash of CN¥3.08b.

A Look At Consun Pharmaceutical Group's Liabilities

According to the last reported balance sheet, Consun Pharmaceutical Group had liabilities of CN¥1.49b due within 12 months, and liabilities of CN¥94.3m due beyond 12 months. On the other hand, it had cash of CN¥3.58b and CN¥310.0m worth of receivables due within a year. So it can boast CN¥2.30b more liquid assets than total liabilities.

This excess liquidity is a great indication that Consun Pharmaceutical Group's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Consun Pharmaceutical Group boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Consun Pharmaceutical Group grew its EBIT by 15% last year, making its debt load easier to handle. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Consun Pharmaceutical Group actually produced more free cash flow than EBIT. 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 we empathize with investors who find debt concerning, you should keep in mind that Consun Pharmaceutical Group has net cash of CN¥3.08b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥766m, being 104% of its EBIT. 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 3 warning signs we think 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.

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.