We Think JiangXi Tianxin Pharmaceutical (SHSE:603235) Can Stay On Top Of Its Debt

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.' 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. As with many other companies JiangXi Tianxin Pharmaceutical Co., Ltd. (SHSE:603235) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for JiangXi Tianxin Pharmaceutical

What Is JiangXi Tianxin Pharmaceutical's Debt?

As you can see below, at the end of March 2024, JiangXi Tianxin Pharmaceutical had CN¥220.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥2.38b in cash, leading to a CN¥2.16b net cash position.

A Look At JiangXi Tianxin Pharmaceutical's Liabilities

Zooming in on the latest balance sheet data, we can see that JiangXi Tianxin Pharmaceutical had liabilities of CN¥508.9m due within 12 months and liabilities of CN¥386.2m due beyond that. Offsetting these obligations, it had cash of CN¥2.38b as well as receivables valued at CN¥353.5m due within 12 months. So it can boast CN¥1.84b more liquid assets than total liabilities.

It's good to see that JiangXi Tianxin Pharmaceutical has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any 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 13% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While JiangXi Tianxin Pharmaceutical 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. During the last three years, JiangXi Tianxin Pharmaceutical produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case JiangXi Tianxin Pharmaceutical has CN¥2.16b in net cash and a decent-looking balance sheet. So we are not troubled with JiangXi Tianxin Pharmaceutical's debt use. 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. Be aware that JiangXi Tianxin Pharmaceutical is showing 3 warning signs in our investment analysis , and 2 of those are significant...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.