Is Hubei Jumpcan Pharmaceutical (SHSE:600566) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Hubei Jumpcan Pharmaceutical Co., Ltd. (SHSE:600566) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hubei Jumpcan Pharmaceutical

What Is Hubei Jumpcan Pharmaceutical's Debt?

As you can see below, at the end of March 2024, Hubei Jumpcan Pharmaceutical had CN¥1.69b of debt, up from CN¥400.0m a year ago. Click the image for more detail. However, it does have CN¥12.8b in cash offsetting this, leading to net cash of CN¥11.1b.

A Look At Hubei Jumpcan Pharmaceutical's Liabilities

The latest balance sheet data shows that Hubei Jumpcan Pharmaceutical had liabilities of CN¥4.96b due within a year, and liabilities of CN¥184.2m falling due after that. Offsetting this, it had CN¥12.8b in cash and CN¥2.04b in receivables that were due within 12 months. So it actually has CN¥9.73b more liquid assets than total liabilities.

This surplus strongly suggests that Hubei Jumpcan Pharmaceutical has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Hubei Jumpcan Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Hubei Jumpcan Pharmaceutical grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. 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 Hubei Jumpcan Pharmaceutical'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hubei Jumpcan Pharmaceutical 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. 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¥11.1b, as well as more liquid assets than liabilities. The cherry on top was that in converted 110% of that EBIT to free cash flow, bringing in CN¥3.2b. When it comes to Hubei Jumpcan Pharmaceutical's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. Case in point: We've spotted 1 warning sign for Hubei Jumpcan Pharmaceutical 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com