Warren Buffett famously said, '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. We can see that Shanghai Shyndec Pharmaceutical Co., Ltd. (SHSE:600420) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shanghai Shyndec Pharmaceutical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Shyndec Pharmaceutical had CN¥1.06b of debt in March 2024, down from CN¥2.57b, one year before. However, it does have CN¥6.41b in cash offsetting this, leading to net cash of CN¥5.35b.

How Strong Is Shanghai Shyndec Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Shanghai Shyndec Pharmaceutical had liabilities of CN¥4.89b due within a year, and liabilities of CN¥198.6m falling due after that. Offsetting these obligations, it had cash of CN¥6.41b as well as receivables valued at CN¥2.03b due within 12 months. So it actually has CN¥3.36b more liquid assets than total liabilities.

This surplus suggests that Shanghai Shyndec Pharmaceutical is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Shanghai Shyndec Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Shanghai Shyndec Pharmaceutical grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanghai Shyndec Pharmaceutical 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Shanghai Shyndec Pharmaceutical 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, Shanghai Shyndec Pharmaceutical actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Shyndec Pharmaceutical has CN¥5.35b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.9b, being 192% of its EBIT. So we don't think Shanghai Shyndec Pharmaceutical's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Shanghai Shyndec Pharmaceutical .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com