We Think Joincare Pharmaceutical Group IndustryLtd (SHSE:600380) Can Manage Its Debt With Ease

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Joincare Pharmaceutical Group Industry Co.,Ltd. (SHSE:600380) does use debt in its business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Joincare Pharmaceutical Group IndustryLtd

How Much Debt Does Joincare Pharmaceutical Group IndustryLtd Carry?

The image below, which you can click on for greater detail, shows that Joincare Pharmaceutical Group IndustryLtd had debt of CN¥5.10b at the end of March 2024, a reduction from CN¥5.83b over a year. However, its balance sheet shows it holds CN¥15.5b in cash, so it actually has CN¥10.4b net cash.

How Healthy Is Joincare Pharmaceutical Group IndustryLtd's Balance Sheet?

We can see from the most recent balance sheet that Joincare Pharmaceutical Group IndustryLtd had liabilities of CN¥9.87b falling due within a year, and liabilities of CN¥3.06b due beyond that. Offsetting these obligations, it had cash of CN¥15.5b as well as receivables valued at CN¥4.84b due within 12 months. So it actually has CN¥7.39b more liquid assets than total liabilities.

This excess liquidity is a great indication that Joincare Pharmaceutical Group IndustryLtd's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Joincare Pharmaceutical Group IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Joincare Pharmaceutical Group IndustryLtd saw its EBIT decline by 3.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Joincare Pharmaceutical Group IndustryLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Joincare Pharmaceutical Group IndustryLtd 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, Joincare Pharmaceutical Group IndustryLtd generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Joincare Pharmaceutical Group IndustryLtd has net cash of CN¥10.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥3.5b, being 86% 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com