Does KPC PharmaceuticalsInc (SHSE:600422) Have A Healthy Balance Sheet?

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 KPC Pharmaceuticals,Inc. (SHSE:600422) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for KPC PharmaceuticalsInc

How Much Debt Does KPC PharmaceuticalsInc Carry?

As you can see below, KPC PharmaceuticalsInc had CN¥769.1m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥2.01b in cash, so it actually has CN¥1.24b net cash.

How Healthy Is KPC PharmaceuticalsInc's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KPC PharmaceuticalsInc had liabilities of CN¥3.95b due within 12 months and liabilities of CN¥357.2m due beyond that. Offsetting these obligations, it had cash of CN¥2.01b as well as receivables valued at CN¥3.71b due within 12 months. So it actually has CN¥1.41b more liquid assets than total liabilities.

This short term liquidity is a sign that KPC PharmaceuticalsInc could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, KPC PharmaceuticalsInc boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, KPC PharmaceuticalsInc's EBIT dived 11%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if KPC PharmaceuticalsInc 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While KPC PharmaceuticalsInc 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, KPC PharmaceuticalsInc produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case KPC PharmaceuticalsInc has CN¥1.24b in net cash and a decent-looking balance sheet. So we don't have any problem with KPC PharmaceuticalsInc's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - KPC PharmaceuticalsInc has 1 warning sign we think you should be aware of.

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.