Is China Shineway Pharmaceutical Group (HKG:2877) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that China Shineway Pharmaceutical Group Limited (HKG:2877) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China Shineway Pharmaceutical Group

How Much Debt Does China Shineway Pharmaceutical Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 China Shineway Pharmaceutical Group had CN¥300.0m of debt, an increase on none, over one year. But on the other hand it also has CN¥5.91b in cash, leading to a CN¥5.61b net cash position.

How Strong Is China Shineway Pharmaceutical Group's Balance Sheet?

We can see from the most recent balance sheet that China Shineway Pharmaceutical Group had liabilities of CN¥2.43b falling due within a year, and liabilities of CN¥105.5m due beyond that. Offsetting these obligations, it had cash of CN¥5.91b as well as receivables valued at CN¥1.32b due within 12 months. So it can boast CN¥4.70b more liquid assets than total liabilities.

This excess liquidity is a great indication that China Shineway Pharmaceutical Group's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, China Shineway Pharmaceutical Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, China Shineway Pharmaceutical Group grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if China Shineway 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. 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. Happily for any shareholders, China Shineway 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 China Shineway Pharmaceutical Group has CN¥5.61b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥788m, being 107% of its EBIT. The bottom line is that China Shineway Pharmaceutical Group's use of debt is absolutely fine. 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 - China Shineway 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.