Is ZhuZhou QianJin PharmaceuticalLtd (SHSE:600479) A Risky Investment?

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.' 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. Importantly, ZhuZhou QianJin Pharmaceutical Co.,Ltd (SHSE:600479) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for ZhuZhou QianJin PharmaceuticalLtd

How Much Debt Does ZhuZhou QianJin PharmaceuticalLtd Carry?

As you can see below, ZhuZhou QianJin PharmaceuticalLtd had CN¥46.8m of debt at September 2024, down from CN¥78.5m a year prior. But it also has CN¥1.73b in cash to offset that, meaning it has CN¥1.69b net cash.

A Look At ZhuZhou QianJin PharmaceuticalLtd's Liabilities

According to the last reported balance sheet, ZhuZhou QianJin PharmaceuticalLtd had liabilities of CN¥1.30b due within 12 months, and liabilities of CN¥94.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.73b as well as receivables valued at CN¥1.01b due within 12 months. So it can boast CN¥1.36b more liquid assets than total liabilities.

It's good to see that ZhuZhou QianJin PharmaceuticalLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, ZhuZhou QianJin PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, ZhuZhou QianJin PharmaceuticalLtd saw its EBIT drop by 7.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ZhuZhou QianJin PharmaceuticalLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. ZhuZhou QianJin PharmaceuticalLtd 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. Over the last three years, ZhuZhou QianJin PharmaceuticalLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ZhuZhou QianJin PharmaceuticalLtd has net cash of CN¥1.69b, as well as more liquid assets than liabilities. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in CN¥378m. So we don't think ZhuZhou QianJin PharmaceuticalLtd's use of debt is risky. 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. Be aware that ZhuZhou QianJin PharmaceuticalLtd is showing 1 warning sign in our investment analysis , you should know about...

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.