Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited (SHSE:600329) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Tianjin Pharmaceutical Da Ren Tang Group's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2024 Tianjin Pharmaceutical Da Ren Tang Group had CN¥1.28b of debt, an increase on CN¥772.5m, over one year. But it also has CN¥1.50b in cash to offset that, meaning it has CN¥216.9m net cash.
A Look At Tianjin Pharmaceutical Da Ren Tang Group's Liabilities
According to the last reported balance sheet, Tianjin Pharmaceutical Da Ren Tang Group had liabilities of CN¥4.19b due within 12 months, and liabilities of CN¥323.7m due beyond 12 months. Offsetting this, it had CN¥1.50b in cash and CN¥2.91b in receivables that were due within 12 months. So it has liabilities totalling CN¥108.9m more than its cash and near-term receivables, combined.
This state of affairs indicates that Tianjin Pharmaceutical Da Ren Tang Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥23.2b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Tianjin Pharmaceutical Da Ren Tang Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Tianjin Pharmaceutical Da Ren Tang Group's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tianjin Pharmaceutical Da Ren Tang Group 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. Over the most recent three years, Tianjin Pharmaceutical Da Ren Tang Group recorded free cash flow worth 78% 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 look at a company's total liabilities, it is very reassuring that Tianjin Pharmaceutical Da Ren Tang Group has CN¥216.9m in net cash. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in CN¥1.0b. So is Tianjin Pharmaceutical Da Ren Tang Group's debt a risk? It doesn't seem so to us. 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. For example - Tianjin Pharmaceutical Da Ren Tang Group has 1 warning sign we think 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.
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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.
