Here's Why Zhejiang CONBA PharmaceuticalLtd (SHSE:600572) Can Manage Its Debt Responsibly

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 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. We can see that Zhejiang CONBA Pharmaceutical Co.,Ltd. (SHSE:600572) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Zhejiang CONBA PharmaceuticalLtd

How Much Debt Does Zhejiang CONBA PharmaceuticalLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Zhejiang CONBA PharmaceuticalLtd had CN¥1.06b of debt in March 2024, down from CN¥1.64b, one year before. But on the other hand it also has CN¥2.37b in cash, leading to a CN¥1.31b net cash position.

A Look At Zhejiang CONBA PharmaceuticalLtd's Liabilities

We can see from the most recent balance sheet that Zhejiang CONBA PharmaceuticalLtd had liabilities of CN¥3.03b falling due within a year, and liabilities of CN¥813.1m due beyond that. Offsetting this, it had CN¥2.37b in cash and CN¥2.14b in receivables that were due within 12 months. So it can boast CN¥660.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang CONBA PharmaceuticalLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zhejiang CONBA PharmaceuticalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Zhejiang CONBA PharmaceuticalLtd's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Zhejiang CONBA PharmaceuticalLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhejiang CONBA PharmaceuticalLtd 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. During the last three years, Zhejiang CONBA PharmaceuticalLtd generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang CONBA PharmaceuticalLtd has CN¥1.31b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in CN¥750m. So we are not troubled with Zhejiang CONBA PharmaceuticalLtd's debt use. 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. For example - Zhejiang CONBA PharmaceuticalLtd has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.