Does Hubei Jumpcan Pharmaceutical (SHSE:600566) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Hubei Jumpcan Pharmaceutical Co., Ltd. (SHSE:600566) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Hubei Jumpcan Pharmaceutical

What Is Hubei Jumpcan Pharmaceutical's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hubei Jumpcan Pharmaceutical had CN¥1.22b of debt, an increase on CN¥839.2m, over one year. But on the other hand it also has CN¥11.7b in cash, leading to a CN¥10.5b net cash position.

How Healthy Is Hubei Jumpcan Pharmaceutical's Balance Sheet?

We can see from the most recent balance sheet that Hubei Jumpcan Pharmaceutical had liabilities of CN¥3.85b falling due within a year, and liabilities of CN¥202.8m due beyond that. Offsetting this, it had CN¥11.7b in cash and CN¥1.93b in receivables that were due within 12 months. So it actually has CN¥9.58b more liquid assets than total liabilities.

This excess liquidity is a great indication that Hubei Jumpcan Pharmaceutical's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Hubei Jumpcan Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Hubei Jumpcan Pharmaceutical has increased its EBIT by 5.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hubei Jumpcan 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, a company can only pay off debt with cold hard cash, not accounting profits. Hubei Jumpcan 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, Hubei Jumpcan Pharmaceutical actually produced more free cash flow than EBIT over the last three years. 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 Hubei Jumpcan Pharmaceutical has net cash of CN¥10.5b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.1b, being 101% of its EBIT. So we don't think Hubei Jumpcan Pharmaceutical's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hubei Jumpcan Pharmaceutical has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.