We Think Jointown Pharmaceutical Group (SHSE:600998) Can Stay On Top Of Its Debt

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.' 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 note that Jointown Pharmaceutical Group Co., Ltd (SHSE:600998) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jointown Pharmaceutical Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Jointown Pharmaceutical Group had CN¥14.1b of debt in September 2024, down from CN¥16.2b, one year before. But it also has CN¥16.2b in cash to offset that, meaning it has CN¥2.10b net cash.

How Strong Is Jointown Pharmaceutical Group's Balance Sheet?

The latest balance sheet data shows that Jointown Pharmaceutical Group had liabilities of CN¥65.7b due within a year, and liabilities of CN¥2.52b falling due after that. Offsetting this, it had CN¥16.2b in cash and CN¥43.2b in receivables that were due within 12 months. So it has liabilities totalling CN¥8.76b more than its cash and near-term receivables, combined.

Jointown Pharmaceutical Group has a market capitalization of CN¥25.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Jointown Pharmaceutical Group boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Jointown Pharmaceutical Group

Notably Jointown Pharmaceutical Group's EBIT was pretty flat over the last year. Ideally it can diminish its debt load by kick-starting earnings growth. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jointown Pharmaceutical 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jointown Pharmaceutical Group 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, Jointown Pharmaceutical Group recorded free cash flow worth 79% 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 Jointown Pharmaceutical Group does have more liabilities than liquid assets, it also has net cash of CN¥2.10b. And it impressed us with free cash flow of CN¥317m, being 79% of its EBIT. So we are not troubled with Jointown Pharmaceutical Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Jointown Pharmaceutical Group , 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.

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.