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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Zhonghong Pulin Medical Products Co., Ltd. (SZSE:300981) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zhonghong Pulin Medical Products

How Much Debt Does Zhonghong Pulin Medical Products Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Zhonghong Pulin Medical Products had debt of CN¥920.6m, up from CN¥499.4m in one year. But on the other hand it also has CN¥2.83b in cash, leading to a CN¥1.91b net cash position.

How Healthy Is Zhonghong Pulin Medical Products' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhonghong Pulin Medical Products had liabilities of CN¥1.50b due within 12 months and liabilities of CN¥151.7m due beyond that. On the other hand, it had cash of CN¥2.83b and CN¥462.9m worth of receivables due within a year. So it actually has CN¥1.64b more liquid assets than total liabilities.

This surplus strongly suggests that Zhonghong Pulin Medical Products has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Zhonghong Pulin Medical Products boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhonghong Pulin Medical Products's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Zhonghong Pulin Medical Products wasn't profitable at an EBIT level, but managed to grow its revenue by 55%, to CN¥2.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Zhonghong Pulin Medical Products?

While Zhonghong Pulin Medical Products lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥36m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Keeping in mind its 55% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Zhonghong Pulin Medical Products .

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.

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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.

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