Zhejiang Jiuzhou Pharmaceutical (SHSE:603456) Seems To Use Debt Quite Sensibly

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.' 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 Jiuzhou Pharmaceutical Co., Ltd (SHSE:603456) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Zhejiang Jiuzhou Pharmaceutical

What Is Zhejiang Jiuzhou Pharmaceutical's Debt?

You can click the graphic below for the historical numbers, but it shows that Zhejiang Jiuzhou Pharmaceutical had CN¥429.1m of debt in June 2024, down from CN¥1.01b, one year before. However, its balance sheet shows it holds CN¥2.96b in cash, so it actually has CN¥2.53b net cash.

A Look At Zhejiang Jiuzhou Pharmaceutical's Liabilities

According to the last reported balance sheet, Zhejiang Jiuzhou Pharmaceutical had liabilities of CN¥1.93b due within 12 months, and liabilities of CN¥725.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.96b as well as receivables valued at CN¥1.42b due within 12 months. So it actually has CN¥1.72b more liquid assets than total liabilities.

This surplus suggests that Zhejiang Jiuzhou Pharmaceutical is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Zhejiang Jiuzhou Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Zhejiang Jiuzhou Pharmaceutical's load is not too heavy, because its EBIT was down 25% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zhejiang Jiuzhou Pharmaceutical's ability to maintain a healthy balance sheet going forward. 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. Zhejiang Jiuzhou 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. In the last three years, Zhejiang Jiuzhou Pharmaceutical's free cash flow amounted to 31% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Jiuzhou Pharmaceutical has CN¥2.53b in net cash and a decent-looking balance sheet. So we don't have any problem with Zhejiang Jiuzhou Pharmaceutical's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Zhejiang Jiuzhou Pharmaceutical that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.