Is Zhonghong Pulin Medical Products (SZSE:300981) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Zhonghong Pulin Medical Products Co., Ltd. (SZSE:300981) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Zhonghong Pulin Medical Products

What Is Zhonghong Pulin Medical Products's Debt?

As you can see below, at the end of September 2024, Zhonghong Pulin Medical Products had CN¥881.0m of debt, up from CN¥540.7m a year ago. Click the image for more detail. However, it does have CN¥2.70b in cash offsetting this, leading to net cash of CN¥1.82b.

A Look At Zhonghong Pulin Medical Products' Liabilities

According to the last reported balance sheet, Zhonghong Pulin Medical Products had liabilities of CN¥1.50b due within 12 months, and liabilities of CN¥130.3m due beyond 12 months. On the other hand, it had cash of CN¥2.70b and CN¥563.9m worth of receivables due within a year. So it actually has CN¥1.64b more liquid assets than total liabilities.

This excess liquidity is a great indication that Zhonghong Pulin Medical Products' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Zhonghong Pulin Medical Products has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Zhonghong Pulin Medical Products can strengthen its balance sheet over time. 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, Zhonghong Pulin Medical Products reported revenue of CN¥2.4b, which is a gain of 22%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Zhonghong Pulin Medical Products?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Zhonghong Pulin Medical Products had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥105m of cash and made a loss of CN¥89m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.82b. That kitty means the company can keep spending for growth for at least two years, at current rates. Zhonghong Pulin Medical Products's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For instance, we've identified 2 warning signs for Zhonghong Pulin Medical Products that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.