JiangSu WuZhong Pharmaceutical Development (SHSE:600200) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that JiangSu WuZhong Pharmaceutical Development Co., Ltd. (SHSE:600200) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for JiangSu WuZhong Pharmaceutical Development

What Is JiangSu WuZhong Pharmaceutical Development's Net Debt?

The chart below, which you can click on for greater detail, shows that JiangSu WuZhong Pharmaceutical Development had CN¥1.80b in debt in March 2024; about the same as the year before. However, because it has a cash reserve of CN¥1.66b, its net debt is less, at about CN¥142.3m.

A Look At JiangSu WuZhong Pharmaceutical Development's Liabilities

We can see from the most recent balance sheet that JiangSu WuZhong Pharmaceutical Development had liabilities of CN¥2.36b falling due within a year, and liabilities of CN¥290.1m due beyond that. Offsetting this, it had CN¥1.66b in cash and CN¥1.18b in receivables that were due within 12 months. So it actually has CN¥190.3m more liquid assets than total liabilities.

This short term liquidity is a sign that JiangSu WuZhong Pharmaceutical Development could probably pay off its debt with ease, as its balance sheet is far from stretched. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, JiangSu WuZhong Pharmaceutical Development reported revenue of CN¥2.3b, which is a gain of 6.3%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, JiangSu WuZhong Pharmaceutical Development had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥36m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with JiangSu WuZhong Pharmaceutical Development .

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.