Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Guangzhou Baiyunshan Pharmaceutical Holdings Company Limited (HKG: 874) uses debt in his business. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
Check out our latest analysis for Guangzhou Baiyunshan Pharmaceutical Holdings
What is the debt of Guangzhou Baiyunshan Pharmaceutical Holdings?
The image below, which you can click for more details, shows that in September 2021, Guangzhou Baiyunshan Pharmaceutical Holdings had a debt of CN 9.84 billion, compared to CN’s 8.26 billion in a year. However, his balance sheet shows that he has CN 24.0 billion in cash, so he actually has net cash of CN 14.1 billion.
How strong is Guangzhou Baiyunshan Pharmaceutical Holdings’ balance sheet?
We can see from the most recent balance sheet that Guangzhou Baiyunshan Pharmaceutical Holdings had liabilities of 31.2 billion yen due within one year and liabilities of 2.56 billion cts due beyond. On the other hand, he had CN 24.0 billion in cash and CN 17.9 billion in receivables due within one year. So he actually CN ¥ 8.07b Following liquid assets as total liabilities.
This excess liquidity suggests that Guangzhou Baiyunshan Pharmaceutical Holdings is taking a cautious approach to debt. Due to its strong net asset position, it should not encounter any problems with its lenders. In short, Guangzhou Baiyunshan Pharmaceutical Holdings has a net cash position, so it is fair to say that it does not have a heavy debt load!
Another good thing is that Guangzhou Baiyunshan Pharmaceutical Holdings increased its EBIT by 15% over the past year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Guangzhou Baiyunshan Pharmaceutical Holdings’ ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Guangzhou Baiyunshan Pharmaceutical Holdings may have net liquidity on the balance sheet, but it is always interesting to examine the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs. in its ability to manage debt. Over the past three years, Guangzhou Baiyunshan Pharmaceutical Holdings has recorded free cash flow of 85% of its EBIT, which is higher than what we usually expect. This positions it well to repay debt if it is desirable.
Even though we sympathize with investors who find the debts worrying, you should keep in mind that Guangzhou Baiyunshan Pharmaceutical Holdings has net cash of 14.1 billion yen, as well as more liquid assets than liabilities. . And he impressed us with free cash flow of 4.9 billion yen, or 85% of his EBIT. We therefore do not believe that the use of debt by Guangzhou Baiyunshan Pharmaceutical Holdings is risky. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 1 warning sign we spotted with Guangzhou Baiyunshan Pharmaceutical Holdings.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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