Tianjin Pharmaceutical Da Ren Tang Group (SGX:T14) Has A Pretty Healthy Balance Sheet

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. As with many other companies Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited (SGX:T14) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

As you can see below, at the end of September 2022, Tianjin Pharmaceutical Da Ren Tang Group had CN¥111.3m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥2.35b in cash to offset that, meaning it has CN¥2.24b net cash.

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

We can see from the most recent balance sheet that Tianjin Pharmaceutical Da Ren Tang Group had liabilities of CN¥2.68b falling due within a year, and liabilities of CN¥193.5m due beyond that. Offsetting this, it had CN¥2.35b in cash and CN¥3.11b in receivables that were due within 12 months. So it actually has CN¥2.59b more liquid assets than total liabilities.

This short term liquidity is a sign that Tianjin Pharmaceutical Da Ren Tang Group could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

On the other hand, Tianjin Pharmaceutical Da Ren Tang Group saw its EBIT drop by 9.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tianjin Pharmaceutical Da Ren Tang 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. Tianjin Pharmaceutical Da Ren Tang 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. During the last three years, Tianjin Pharmaceutical Da Ren Tang Group produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tianjin Pharmaceutical Da Ren Tang Group has net cash of CN¥2.24b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥188m, being 73% of its EBIT. So we don't think Tianjin Pharmaceutical Da Ren Tang Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Tianjin Pharmaceutical Da Ren Tang Group .

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.