Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Sihuan Pharmaceutical Holdings Group Ltd. (HKG:460) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Sihuan Pharmaceutical Holdings Group

How Much Debt Does Sihuan Pharmaceutical Holdings Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Sihuan Pharmaceutical Holdings Group had CN¥1.27b of debt, an increase on CN¥1.12b, over one year. But it also has CN¥4.51b in cash to offset that, meaning it has CN¥3.24b net cash.

How Strong Is Sihuan Pharmaceutical Holdings Group's Balance Sheet?

The latest balance sheet data shows that Sihuan Pharmaceutical Holdings Group had liabilities of CN¥2.24b due within a year, and liabilities of CN¥4.28b falling due after that. Offsetting these obligations, it had cash of CN¥4.51b as well as receivables valued at CN¥1.09b due within 12 months. So it has liabilities totalling CN¥924.4m more than its cash and near-term receivables, combined.

Since publicly traded Sihuan Pharmaceutical Holdings Group shares are worth a total of CN¥5.46b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Sihuan Pharmaceutical Holdings Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sihuan Pharmaceutical Holdings Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Sihuan Pharmaceutical Holdings Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.8b, which is a fall of 32%. That makes us nervous, to say the least.

So How Risky Is Sihuan Pharmaceutical Holdings Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Sihuan Pharmaceutical Holdings Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥697m and booked a CN¥2.0b accounting loss. With only CN¥3.24b on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Sihuan Pharmaceutical Holdings Group's profit, revenue, and operating cashflow have changed over the last few years.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.