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 note that Teyi Pharmaceutical Group Co.,Ltd (SZSE:002728) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Teyi Pharmaceutical GroupLtd's Net Debt?

As you can see below, Teyi Pharmaceutical GroupLtd had CN¥453.0m of debt at June 2024, down from CN¥589.7m a year prior. However, it does have CN¥514.2m in cash offsetting this, leading to net cash of CN¥61.2m.

A Look At Teyi Pharmaceutical GroupLtd's Liabilities

We can see from the most recent balance sheet that Teyi Pharmaceutical GroupLtd had liabilities of CN¥544.8m falling due within a year, and liabilities of CN¥35.0m due beyond that. Offsetting these obligations, it had cash of CN¥514.2m as well as receivables valued at CN¥118.5m due within 12 months. So it actually has CN¥52.9m more liquid assets than total liabilities.

Having regard to Teyi Pharmaceutical GroupLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.03b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Teyi Pharmaceutical GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Teyi Pharmaceutical GroupLtd if management cannot prevent a repeat of the 59% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Teyi Pharmaceutical GroupLtd 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. While Teyi Pharmaceutical GroupLtd 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, Teyi Pharmaceutical GroupLtd produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Teyi Pharmaceutical GroupLtd has CN¥61.2m in net cash and a decent-looking balance sheet. So we are not troubled with Teyi Pharmaceutical GroupLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Teyi Pharmaceutical GroupLtd (including 1 which makes us a bit uncomfortable) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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