Is Sihuan Pharmaceutical Holdings Group (HKG:460) Using Too Much Debt?

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.' 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. We note that Sihuan Pharmaceutical Holdings Group Ltd. (HKG:460) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sihuan Pharmaceutical Holdings Group

How Much Debt Does Sihuan Pharmaceutical Holdings Group Carry?

The image below, which you can click on for greater detail, shows that Sihuan Pharmaceutical Holdings Group had debt of CN¥1.09b at the end of June 2024, a reduction from CN¥1.27b over a year. However, it does have CN¥4.86b in cash offsetting this, leading to net cash of CN¥3.78b.

How Healthy Is Sihuan Pharmaceutical Holdings Group's Balance Sheet?

We can see from the most recent balance sheet that Sihuan Pharmaceutical Holdings Group had liabilities of CN¥4.12b falling due within a year, and liabilities of CN¥2.32b due beyond that. On the other hand, it had cash of CN¥4.86b and CN¥1.25b worth of receivables due within a year. So its liabilities total CN¥319.9m more than the combination of its cash and short-term receivables.

Of course, Sihuan Pharmaceutical Holdings Group has a market capitalization of CN¥4.88b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Sihuan Pharmaceutical Holdings Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sihuan Pharmaceutical Holdings Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Sihuan Pharmaceutical Holdings Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Sihuan Pharmaceutical Holdings Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Sihuan Pharmaceutical Holdings Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥40m of cash and made a loss of CN¥38m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥3.78b. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 Sihuan Pharmaceutical Holdings 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.

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.