David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Teyi Pharmaceutical Group Co.,Ltd (SZSE:002728) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Teyi Pharmaceutical GroupLtd Carry?
As you can see below, Teyi Pharmaceutical GroupLtd had CN¥589.7m of debt at September 2023, down from CN¥930.7m a year prior. But on the other hand it also has CN¥617.8m in cash, leading to a CN¥28.1m net cash position.
How Healthy Is Teyi Pharmaceutical GroupLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Teyi Pharmaceutical GroupLtd had liabilities of CN¥702.0m due within 12 months and liabilities of CN¥35.0m due beyond that. Offsetting this, it had CN¥617.8m in cash and CN¥99.3m in receivables that were due within 12 months. So its liabilities total CN¥19.8m more than the combination of its cash and short-term receivables.
This state of affairs indicates that Teyi Pharmaceutical GroupLtd'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¥4.91b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Teyi Pharmaceutical GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Teyi Pharmaceutical GroupLtd has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, Teyi Pharmaceutical GroupLtd 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 Teyi Pharmaceutical GroupLtd has CN¥28.1m in net cash. And it impressed us with its EBIT growth of 67% over the last year. So is Teyi Pharmaceutical GroupLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Teyi Pharmaceutical GroupLtd .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.