Is Joincare Pharmaceutical Group IndustryLtd (SHSE:600380) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Joincare Pharmaceutical Group Industry Co.,Ltd. (SHSE:600380) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Joincare Pharmaceutical Group IndustryLtd

What Is Joincare Pharmaceutical Group IndustryLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Joincare Pharmaceutical Group IndustryLtd had CN¥5.35b of debt in September 2024, down from CN¥5.79b, one year before. But on the other hand it also has CN¥15.3b in cash, leading to a CN¥9.97b net cash position.

A Look At Joincare Pharmaceutical Group IndustryLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Joincare Pharmaceutical Group IndustryLtd had liabilities of CN¥10.6b due within 12 months and liabilities of CN¥2.06b due beyond that. Offsetting these obligations, it had cash of CN¥15.3b as well as receivables valued at CN¥4.60b due within 12 months. So it actually has CN¥7.29b more liquid assets than total liabilities.

This surplus strongly suggests that Joincare Pharmaceutical Group IndustryLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Joincare Pharmaceutical Group IndustryLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Joincare Pharmaceutical Group IndustryLtd has increased its EBIT by 8.5% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Joincare Pharmaceutical Group IndustryLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Joincare Pharmaceutical Group IndustryLtd 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. Over the last three years, Joincare Pharmaceutical Group IndustryLtd recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Joincare Pharmaceutical Group IndustryLtd has CN¥9.97b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥3.0b, being 90% of its EBIT. So we don't think Joincare Pharmaceutical Group IndustryLtd's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Joincare Pharmaceutical Group IndustryLtd's earnings per share history for free.

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.