Is Zhejiang Ausun Pharmaceutical (SHSE:603229) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Ausun Pharmaceutical Co., Ltd. (SHSE:603229) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Zhejiang Ausun Pharmaceutical

What Is Zhejiang Ausun Pharmaceutical's Debt?

As you can see below, Zhejiang Ausun Pharmaceutical had CN¥300.3m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥1.03b in cash, so it actually has CN¥725.1m net cash.

How Strong Is Zhejiang Ausun Pharmaceutical's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Ausun Pharmaceutical had liabilities of CN¥686.3m falling due within a year, and liabilities of CN¥37.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.03b as well as receivables valued at CN¥299.7m due within 12 months. So it actually has CN¥601.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Ausun Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhejiang Ausun Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

Zhejiang Ausun Pharmaceutical's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhejiang Ausun Pharmaceutical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang Ausun 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. Over the last three years, Zhejiang Ausun Pharmaceutical saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Ausun Pharmaceutical has net cash of CN¥725.1m, as well as more liquid assets than liabilities. So we don't have any problem with Zhejiang Ausun Pharmaceutical's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Ausun Pharmaceutical .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.