These 4 Measures Indicate That Zhangzhou Pientzehuang Pharmaceutical (SHSE:600436) Is Using Debt Safely

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.' 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. As with many other companies Zhangzhou Pientzehuang Pharmaceutical., Ltd (SHSE:600436) makes use of debt. But should shareholders be worried about its use of debt?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zhangzhou Pientzehuang Pharmaceutical

What Is Zhangzhou Pientzehuang Pharmaceutical's Debt?

As you can see below, at the end of September 2024, Zhangzhou Pientzehuang Pharmaceutical had CN¥1.06b of debt, up from CN¥843.4m a year ago. Click the image for more detail. However, it does have CN¥3.27b in cash offsetting this, leading to net cash of CN¥2.21b.

How Healthy Is Zhangzhou Pientzehuang Pharmaceutical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhangzhou Pientzehuang Pharmaceutical had liabilities of CN¥3.10b due within 12 months and liabilities of CN¥289.5m due beyond that. On the other hand, it had cash of CN¥3.27b and CN¥936.3m worth of receivables due within a year. So it can boast CN¥820.1m more liquid assets than total liabilities.

Having regard to Zhangzhou Pientzehuang Pharmaceutical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥154.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Zhangzhou Pientzehuang Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Zhangzhou Pientzehuang Pharmaceutical grew its EBIT by 7.2% in the last year, making that debt load look even more manageable. 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 Zhangzhou Pientzehuang Pharmaceutical's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zhangzhou Pientzehuang Pharmaceutical 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. Happily for any shareholders, Zhangzhou Pientzehuang Pharmaceutical actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhangzhou Pientzehuang Pharmaceutical has CN¥2.21b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in CN¥1.0b. So is Zhangzhou Pientzehuang Pharmaceutical'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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Zhangzhou Pientzehuang Pharmaceutical that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.