China Shineway Pharmaceutical Group (HKG:2877) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies China Shineway Pharmaceutical Group Limited (HKG:2877) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China Shineway Pharmaceutical Group

What Is China Shineway Pharmaceutical Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 China Shineway Pharmaceutical Group had debt of CN¥300.0m, up from CN¥13.8m in one year. But it also has CN¥5.36b in cash to offset that, meaning it has CN¥5.06b net cash.

A Look At China Shineway Pharmaceutical Group's Liabilities

We can see from the most recent balance sheet that China Shineway Pharmaceutical Group had liabilities of CN¥2.08b falling due within a year, and liabilities of CN¥185.9m due beyond that. Offsetting these obligations, it had cash of CN¥5.36b as well as receivables valued at CN¥1.21b due within 12 months. So it can boast CN¥4.31b more liquid assets than total liabilities.

This luscious liquidity implies that China Shineway 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. Succinctly put, China Shineway Pharmaceutical Group 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 China Shineway Pharmaceutical Group has boosted its EBIT by 68%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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. While China Shineway 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, China Shineway Pharmaceutical Group recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay 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¥5.06b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥801m, being 98% of its EBIT. The bottom line is that China Shineway Pharmaceutical Group's use of debt is absolutely fine. 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. We've identified 1 warning sign with China Shineway Pharmaceutical Group , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.