These 4 Measures Indicate That Consun Pharmaceutical Group (HKG:1681) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Consun Pharmaceutical Group Limited (HKG:1681) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Consun Pharmaceutical Group

What Is Consun Pharmaceutical Group's Debt?

The chart below, which you can click on for greater detail, shows that Consun Pharmaceutical Group had CN¥507.7m in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds CN¥3.58b in cash, so it actually has CN¥3.07b net cash.

How Healthy Is Consun Pharmaceutical Group's Balance Sheet?

The latest balance sheet data shows that Consun Pharmaceutical Group had liabilities of CN¥1.39b due within a year, and liabilities of CN¥112.5m falling due after that. Offsetting these obligations, it had cash of CN¥3.58b as well as receivables valued at CN¥274.1m due within 12 months. So it can boast CN¥2.36b more liquid assets than total liabilities.

This luscious liquidity implies that Consun Pharmaceutical Group's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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¥3.07b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥833m, being 104% of its EBIT. So we don't think Consun Pharmaceutical Group's use of debt is risky. 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, we've discovered 2 warning signs for Consun Pharmaceutical Group that you should be aware of before investing here.

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.