We Think KPC PharmaceuticalsInc (SHSE:600422) Can Stay On Top Of Its 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 KPC Pharmaceuticals,Inc (SHSE:600422) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for KPC PharmaceuticalsInc

What Is KPC PharmaceuticalsInc's Debt?

As you can see below, at the end of March 2024, KPC PharmaceuticalsInc had CN¥855.0m of debt, up from CN¥816.2m a year ago. Click the image for more detail. But it also has CN¥1.96b in cash to offset that, meaning it has CN¥1.11b net cash.

How Healthy Is KPC PharmaceuticalsInc's Balance Sheet?

According to the last reported balance sheet, KPC PharmaceuticalsInc had liabilities of CN¥3.80b due within 12 months, and liabilities of CN¥429.1m due beyond 12 months. On the other hand, it had cash of CN¥1.96b and CN¥3.36b worth of receivables due within a year. So it actually has CN¥1.10b 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.

On the other hand, KPC PharmaceuticalsInc's EBIT dived 15%, 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 it is future earnings, more than anything, that will determine KPC PharmaceuticalsInc'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 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. In the last three years, KPC PharmaceuticalsInc's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case KPC PharmaceuticalsInc has CN¥1.11b in net cash and a decent-looking balance sheet. So we don't have any problem with KPC PharmaceuticalsInc's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for KPC PharmaceuticalsInc that you should be aware of before investing here.

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.