Is Hubei Jumpcan Pharmaceutical (SHSE:600566) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Hubei Jumpcan Pharmaceutical Co., Ltd. (SHSE:600566) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Net Debt?

As you can see below, at the end of September 2024, Hubei Jumpcan Pharmaceutical had CN¥1.22b of debt, up from CN¥839.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥11.7b in cash, so it actually has CN¥10.5b net cash.

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How Healthy Is Hubei Jumpcan Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Hubei Jumpcan Pharmaceutical had liabilities of CN¥3.85b due within 12 months, and liabilities of CN¥202.8m due beyond 12 months. On the other hand, it had cash of CN¥11.7b and CN¥1.93b worth of receivables due within a year. So it actually has CN¥9.58b more liquid assets than total liabilities.

This surplus liquidity suggests that Hubei Jumpcan Pharmaceutical's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Hubei Jumpcan Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Hubei Jumpcan Pharmaceutical grew its EBIT by 5.7% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hubei Jumpcan Pharmaceutical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last three years, Hubei Jumpcan Pharmaceutical actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 is Hubei Jumpcan Pharmaceutical's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Hubei Jumpcan Pharmaceutical , and understanding them should be part of your investment process.

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.