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 Tianjin Chase Sun Pharmaceutical Co.,Ltd (SZSE:300026) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Tianjin Chase Sun PharmaceuticalLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Tianjin Chase Sun PharmaceuticalLtd had debt of CN¥1.41b at the end of June 2024, a reduction from CN¥1.74b over a year. However, its balance sheet shows it holds CN¥1.65b in cash, so it actually has CN¥234.2m net cash.

How Strong Is Tianjin Chase Sun PharmaceuticalLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tianjin Chase Sun PharmaceuticalLtd had liabilities of CN¥1.68b due within 12 months and liabilities of CN¥1.41b due beyond that. Offsetting these obligations, it had cash of CN¥1.65b as well as receivables valued at CN¥3.12b due within 12 months. So it can boast CN¥1.67b more liquid assets than total liabilities.

This excess liquidity suggests that Tianjin Chase Sun PharmaceuticalLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Tianjin Chase Sun PharmaceuticalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Tianjin Chase Sun PharmaceuticalLtd's saving grace is its low debt levels, because its EBIT has tanked 65% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tianjin Chase Sun PharmaceuticalLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tianjin Chase Sun PharmaceuticalLtd 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. Over the most recent three years, Tianjin Chase Sun PharmaceuticalLtd recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tianjin Chase Sun PharmaceuticalLtd has CN¥234.2m in net cash and a decent-looking balance sheet. So we are not troubled with Tianjin Chase Sun PharmaceuticalLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Tianjin Chase Sun PharmaceuticalLtd that you should be aware of before investing here.

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.

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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.