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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Zhangzhou Pientzehuang Pharmaceutical., Ltd (SHSE:600436) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Zhangzhou Pientzehuang Pharmaceutical

What Is Zhangzhou Pientzehuang Pharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhangzhou Pientzehuang Pharmaceutical had debt of CN¥1.16b, up from CN¥904.0m in one year. However, its balance sheet shows it holds CN¥2.37b in cash, so it actually has CN¥1.22b net cash.

How Strong Is Zhangzhou Pientzehuang Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Zhangzhou Pientzehuang Pharmaceutical had liabilities of CN¥3.10b due within a year, and liabilities of CN¥290.1m falling due after that. Offsetting this, it had CN¥2.37b in cash and CN¥1.14b in receivables that were due within 12 months. So it can boast CN¥124.4m 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 while it's hard to imagine that the CN¥138.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Zhangzhou Pientzehuang Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Zhangzhou Pientzehuang Pharmaceutical grew its EBIT by 17% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Zhangzhou Pientzehuang Pharmaceutical generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhangzhou Pientzehuang Pharmaceutical has net cash of CN¥1.22b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.0b, being 96% of its EBIT. So is Zhangzhou Pientzehuang Pharmaceutical's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Zhangzhou Pientzehuang Pharmaceutical, you may well want to click here to check an interactive graph of its earnings per share history.

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.