Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited (SHSE:600329) 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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

As you can see below, Tianjin Pharmaceutical Da Ren Tang Group had CN¥625.9m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥2.46b in cash, leading to a CN¥1.83b net cash position.

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¥3.67b falling due within a year, and liabilities of CN¥351.0m due beyond that. Offsetting these obligations, it had cash of CN¥2.46b as well as receivables valued at CN¥3.33b due within 12 months. So it actually has CN¥1.76b 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 the other hand, Tianjin Pharmaceutical Da Ren Tang Group saw its EBIT drop by 2.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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.

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¥1.83b, as well as more liquid assets than liabilities. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in CN¥302m. So we don't think Tianjin Pharmaceutical Da Ren Tang Group'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. Case in point: We've spotted 1 warning sign for Tianjin Pharmaceutical Da Ren Tang Group you should be aware of.

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.

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.

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