We Think Tianjin Pharmaceutical Da Ren Tang Group (SGX:T14) Can Manage Its Debt With Ease

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. Importantly, Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited (SGX:T14) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

View our latest analysis for Tianjin Pharmaceutical Da Ren Tang Group

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

The image below, which you can click on for greater detail, shows that at March 2023 Tianjin Pharmaceutical Da Ren Tang Group had debt of CN¥606.1m, up from CN¥29.6m in one year. However, its balance sheet shows it holds CN¥3.46b in cash, so it actually has CN¥2.85b net cash.

A Look At Tianjin Pharmaceutical Da Ren Tang Group's Liabilities

We can see from the most recent balance sheet that Tianjin Pharmaceutical Da Ren Tang Group had liabilities of CN¥3.56b falling due within a year, and liabilities of CN¥373.1m due beyond that. Offsetting these obligations, it had cash of CN¥3.46b as well as receivables valued at CN¥2.81b due within 12 months. So it actually has CN¥2.34b 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. Succinctly put, Tianjin Pharmaceutical Da Ren Tang Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Tianjin Pharmaceutical Da Ren Tang Group grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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. During the last three years, Tianjin Pharmaceutical Da Ren Tang Group generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tianjin Pharmaceutical Da Ren Tang Group has CN¥2.85b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in CN¥679m. So we don't think Tianjin Pharmaceutical Da Ren Tang Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Tianjin Pharmaceutical Da Ren Tang Group , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.