Is Tianjin Pharmaceutical Da Ren Tang Group (SGX:T14) A Risky Investment?

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.' 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, Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited (SGX:T14) does carry 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Tianjin Pharmaceutical Da Ren Tang Group

What Is Tianjin Pharmaceutical Da Ren Tang Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Tianjin Pharmaceutical Da Ren Tang Group had CN¥772.5m of debt, an increase on CN¥111.3m, over one year. But it also has CN¥2.02b in cash to offset that, meaning it has CN¥1.25b net cash.

How Healthy Is Tianjin Pharmaceutical Da Ren Tang Group's Balance Sheet?

The latest balance sheet data shows that Tianjin Pharmaceutical Da Ren Tang Group had liabilities of CN¥3.40b due within a year, and liabilities of CN¥360.8m falling due after that. Offsetting this, it had CN¥2.02b in cash and CN¥2.86b in receivables that were due within 12 months. So it actually has CN¥1.11b more liquid assets than total liabilities.

This surplus suggests that Tianjin Pharmaceutical Da Ren Tang Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Tianjin Pharmaceutical Da Ren Tang Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Tianjin Pharmaceutical Da Ren Tang Group grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. 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 Tianjin Pharmaceutical Da Ren Tang 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, a company can only pay off debt with cold hard cash, not accounting profits. While Tianjin Pharmaceutical Da Ren Tang 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 most recent three years, Tianjin Pharmaceutical Da Ren Tang Group recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tianjin Pharmaceutical Da Ren Tang Group has CN¥1.25b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 27% over the last year. So is Tianjin Pharmaceutical Da Ren Tang 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. For example - Tianjin Pharmaceutical Da Ren Tang Group has 1 warning sign we think you should be aware of.

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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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.