These 4 Measures Indicate That KPC PharmaceuticalsInc (SHSE:600422) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 KPC Pharmaceuticals,Inc. (SHSE:600422) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KPC PharmaceuticalsInc

What Is KPC PharmaceuticalsInc's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 KPC PharmaceuticalsInc had debt of CN¥854.3m, up from CN¥606.1m in one year. But on the other hand it also has CN¥2.22b in cash, leading to a CN¥1.37b net cash position.

How Strong Is KPC PharmaceuticalsInc's Balance Sheet?

According to the last reported balance sheet, KPC PharmaceuticalsInc had liabilities of CN¥4.03b due within 12 months, and liabilities of CN¥468.7m due beyond 12 months. Offsetting this, it had CN¥2.22b in cash and CN¥3.35b in receivables that were due within 12 months. So it actually has CN¥1.07b more liquid assets than total liabilities.

This surplus suggests that KPC PharmaceuticalsInc has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that KPC PharmaceuticalsInc has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that KPC PharmaceuticalsInc has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. KPC PharmaceuticalsInc 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, 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 we empathize with investors who find debt concerning, you should keep in mind that KPC PharmaceuticalsInc has net cash of CN¥1.37b, as well as more liquid assets than liabilities. And we liked the look of last year's 27% year-on-year EBIT growth. So is KPC PharmaceuticalsInc's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. 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.