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.' 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. As with many other companies Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd (SHSE:688336) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Sunshine Guojian Pharmaceutical (Shanghai)'s Debt?

As you can see below, Sunshine Guojian Pharmaceutical (Shanghai) had CN¥50.0m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥1.52b in cash to offset that, meaning it has CN¥1.47b net cash.

How Healthy Is Sunshine Guojian Pharmaceutical (Shanghai)'s Balance Sheet?

According to the last reported balance sheet, Sunshine Guojian Pharmaceutical (Shanghai) had liabilities of CN¥302.9m due within 12 months, and liabilities of CN¥113.3m due beyond 12 months. On the other hand, it had cash of CN¥1.52b and CN¥116.3m worth of receivables due within a year. So it can boast CN¥1.22b more liquid assets than total liabilities.

This short term liquidity is a sign that Sunshine Guojian Pharmaceutical (Shanghai) could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sunshine Guojian Pharmaceutical (Shanghai) has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Sunshine Guojian Pharmaceutical (Shanghai) turned things around in the last 12 months, delivering and EBIT of CN¥254m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sunshine Guojian Pharmaceutical (Shanghai) 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sunshine Guojian Pharmaceutical (Shanghai) 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 last year, Sunshine Guojian Pharmaceutical (Shanghai) recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sunshine Guojian Pharmaceutical (Shanghai) has CN¥1.47b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in CN¥251m. So is Sunshine Guojian Pharmaceutical (Shanghai)'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. We've identified 2 warning signs with Sunshine Guojian Pharmaceutical (Shanghai) (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.