Health Check: How Prudently Does JiangSu WuZhong Pharmaceutical Development (SHSE:600200) Use 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that JiangSu WuZhong Pharmaceutical Development Co., Ltd. (SHSE:600200) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for JiangSu WuZhong Pharmaceutical Development

How Much Debt Does JiangSu WuZhong Pharmaceutical Development Carry?

As you can see below, JiangSu WuZhong Pharmaceutical Development had CN¥1.77b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.78b in cash offsetting this, leading to net cash of CN¥10.2m.

How Strong Is JiangSu WuZhong Pharmaceutical Development's Balance Sheet?

According to the last reported balance sheet, JiangSu WuZhong Pharmaceutical Development had liabilities of CN¥2.01b due within 12 months, and liabilities of CN¥276.5m due beyond 12 months. On the other hand, it had cash of CN¥1.78b and CN¥1.01b worth of receivables due within a year. So it actually has CN¥507.6m more liquid assets than total liabilities.

This surplus suggests that JiangSu WuZhong Pharmaceutical Development has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that JiangSu WuZhong Pharmaceutical Development has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if JiangSu WuZhong Pharmaceutical Development 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, JiangSu WuZhong Pharmaceutical Development saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is JiangSu WuZhong Pharmaceutical Development?

Although JiangSu WuZhong Pharmaceutical Development had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥17m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how JiangSu WuZhong Pharmaceutical Development's profit, revenue, and operating cashflow have changed over the last few years.

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.

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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.