Is Zhejiang CONBA PharmaceuticalLtd (SHSE:600572) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Zhejiang CONBA Pharmaceutical Co.,Ltd. (SHSE:600572) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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 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¥617.6m of debt in June 2024, down from CN¥1.51b, one year before. However, its balance sheet shows it holds CN¥1.39b in cash, so it actually has CN¥770.3m net cash.

How Healthy Is Zhejiang CONBA PharmaceuticalLtd's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang CONBA PharmaceuticalLtd had liabilities of CN¥2.76b falling due within a year, and liabilities of CN¥538.2m due beyond that. On the other hand, it had cash of CN¥1.39b and CN¥2.06b worth of receivables due within a year. So it can boast CN¥159.2m more liquid assets than total liabilities.

Having regard to Zhejiang CONBA PharmaceuticalLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥10.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Zhejiang CONBA PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Zhejiang CONBA PharmaceuticalLtd if management cannot prevent a repeat of the 44% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zhejiang CONBA 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. During the last three years, Zhejiang CONBA PharmaceuticalLtd generated free cash flow amounting to a very robust 93% 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¥770.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥537m, being 93% of its EBIT. So we don't have any problem with Zhejiang CONBA PharmaceuticalLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Zhejiang CONBA PharmaceuticalLtd .

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.

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

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.