China Shineway Pharmaceutical Group (HKG:2877) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, China Shineway Pharmaceutical Group Limited (HKG:2877) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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.

Check out our latest analysis for China Shineway Pharmaceutical Group

What Is China Shineway Pharmaceutical Group's Debt?

The image below, which you can click on for greater detail, shows that China Shineway Pharmaceutical Group had debt of CN¥369.3m at the end of December 2020, a reduction from CN¥398.4m over a year. However, its balance sheet shows it holds CN¥3.94b in cash, so it actually has CN¥3.57b net cash.

A Look At China Shineway Pharmaceutical Group's Liabilities

Zooming in on the latest balance sheet data, we can see that China Shineway Pharmaceutical Group had liabilities of CN¥1.19b due within 12 months and liabilities of CN¥224.6m due beyond that. Offsetting this, it had CN¥3.94b in cash and CN¥760.7m in receivables that were due within 12 months. So it actually has CN¥3.28b more liquid assets than total liabilities.

This surplus strongly suggests that China Shineway Pharmaceutical Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that China Shineway Pharmaceutical Group has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, China Shineway Pharmaceutical Group saw its EBIT drop by 9.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine China Shineway Pharmaceutical Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. China Shineway Pharmaceutical Group 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. In the last three years, China Shineway Pharmaceutical Group's free cash flow amounted to 48% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that China Shineway Pharmaceutical Group has net cash of CN¥3.57b, as well as more liquid assets than liabilities. So is China Shineway Pharmaceutical Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that China Shineway Pharmaceutical Group is showing 3 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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