Warren Buffett famously said, '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. We note that Changzhou Qianhong Biopharma CO.,LTD (SZSE:002550) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Changzhou Qianhong BiopharmaLTD Carry?
You can click the graphic below for the historical numbers, but it shows that Changzhou Qianhong BiopharmaLTD had CN¥20.0m of debt in September 2023, down from CN¥103.0m, one year before. But it also has CN¥502.8m in cash to offset that, meaning it has CN¥482.8m net cash.
How Strong Is Changzhou Qianhong BiopharmaLTD's Balance Sheet?
According to the last reported balance sheet, Changzhou Qianhong BiopharmaLTD had liabilities of CN¥171.2m due within 12 months, and liabilities of CN¥87.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥502.8m as well as receivables valued at CN¥318.8m due within 12 months. So it can boast CN¥562.6m more liquid assets than total liabilities.
This short term liquidity is a sign that Changzhou Qianhong BiopharmaLTD could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Changzhou Qianhong BiopharmaLTD has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Changzhou Qianhong BiopharmaLTD grew its EBIT by 140% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Changzhou Qianhong BiopharmaLTD can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Changzhou Qianhong BiopharmaLTD 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. Looking at the most recent three years, Changzhou Qianhong BiopharmaLTD recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Changzhou Qianhong BiopharmaLTD has CN¥482.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 140% year-on-year EBIT growth. So is Changzhou Qianhong BiopharmaLTD's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Changzhou Qianhong BiopharmaLTD that you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.