Does JiangXi Tianxin Pharmaceutical (SHSE:603235) Have A Healthy Balance Sheet?

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 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. Importantly, JiangXi Tianxin Pharmaceutical Co., Ltd. (SHSE:603235) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 JiangXi Tianxin Pharmaceutical

What Is JiangXi Tianxin Pharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 JiangXi Tianxin Pharmaceutical had debt of CN¥103.2m, up from none in one year. However, it does have CN¥2.31b in cash offsetting this, leading to net cash of CN¥2.20b.

How Healthy Is JiangXi Tianxin Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, JiangXi Tianxin Pharmaceutical had liabilities of CN¥461.3m due within 12 months, and liabilities of CN¥395.9m due beyond 12 months. Offsetting this, it had CN¥2.31b in cash and CN¥286.0m in receivables that were due within 12 months. So it actually has CN¥1.74b more liquid assets than total liabilities.

This surplus suggests that JiangXi Tianxin Pharmaceutical is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that JiangXi Tianxin Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that JiangXi Tianxin Pharmaceutical has seen its EBIT plunge 18% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since JiangXi Tianxin Pharmaceutical will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. JiangXi Tianxin Pharmaceutical 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. During the last three years, JiangXi Tianxin Pharmaceutical produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case JiangXi Tianxin Pharmaceutical has CN¥2.20b in net cash and a decent-looking balance sheet. So we are not troubled with JiangXi Tianxin Pharmaceutical's debt use. 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. For example, we've discovered 2 warning signs for JiangXi Tianxin Pharmaceutical (1 is a bit unpleasant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.