We Think Jianmin Pharmaceutical GroupLtd (SHSE:600976) Can Stay On Top Of Its Debt

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. Importantly, Jianmin Pharmaceutical Group Co.,Ltd. (SHSE:600976) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jianmin Pharmaceutical GroupLtd

How Much Debt Does Jianmin Pharmaceutical GroupLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Jianmin Pharmaceutical GroupLtd had debt of CN¥84.4m, up from CN¥78.5m in one year. But on the other hand it also has CN¥943.1m in cash, leading to a CN¥858.7m net cash position.

How Healthy Is Jianmin Pharmaceutical GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Jianmin Pharmaceutical GroupLtd had liabilities of CN¥1.90b falling due within a year, and liabilities of CN¥72.3m due beyond that. On the other hand, it had cash of CN¥943.1m and CN¥1.35b worth of receivables due within a year. So it can boast CN¥313.3m more liquid assets than total liabilities.

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

The good news is that Jianmin Pharmaceutical GroupLtd has increased its EBIT by 9.0% over twelve months, which should ease any concerns about debt repayment. 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 Jianmin Pharmaceutical GroupLtd 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. Jianmin Pharmaceutical GroupLtd 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, Jianmin Pharmaceutical GroupLtd produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jianmin Pharmaceutical GroupLtd has net cash of CN¥858.7m, as well as more liquid assets than liabilities. So we don't think Jianmin Pharmaceutical GroupLtd's use of debt is risky. 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. For example Jianmin Pharmaceutical GroupLtd has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.

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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