Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited (SGX:T14) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Tianjin Pharmaceutical Da Ren Tang Group
What Is Tianjin Pharmaceutical Da Ren Tang Group's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Tianjin Pharmaceutical Da Ren Tang Group had debt of CN¥772.5m, up from CN¥111.3m in one year. However, its balance sheet shows it holds CN¥2.02b in cash, so it actually has CN¥1.25b net cash.
How Healthy Is Tianjin Pharmaceutical Da Ren Tang Group's Balance Sheet?
We can see from the most recent balance sheet that Tianjin Pharmaceutical Da Ren Tang Group had liabilities of CN¥3.40b falling due within a year, and liabilities of CN¥360.8m due beyond that. Offsetting these obligations, it had cash of CN¥2.02b as well as receivables valued at CN¥2.86b due within 12 months. So it can boast CN¥1.11b more liquid assets than total liabilities.
This short term liquidity is a sign that Tianjin Pharmaceutical Da Ren Tang Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Tianjin Pharmaceutical Da Ren Tang Group has more cash than debt is arguably a good indication that it can manage its debt safely.
Also positive, Tianjin Pharmaceutical Da Ren Tang Group grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. 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 Tianjin Pharmaceutical Da Ren Tang Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tianjin Pharmaceutical Da Ren Tang Group 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 Pharmaceutical Da Ren Tang Group recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Tianjin Pharmaceutical Da Ren Tang Group has CN¥1.25b in net cash and a decent-looking balance sheet. And we liked the look of last year's 27% year-on-year EBIT growth. So is Tianjin Pharmaceutical Da Ren Tang Group'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. Case in point: We've spotted 1 warning sign for Tianjin Pharmaceutical Da Ren Tang Group you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.