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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Zhejiang Jiuzhou Pharmaceutical Co., Ltd (SHSE:603456) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zhejiang Jiuzhou Pharmaceutical

How Much Debt Does Zhejiang Jiuzhou Pharmaceutical Carry?

The image below, which you can click on for greater detail, shows that Zhejiang Jiuzhou Pharmaceutical had debt of CN¥492.3m at the end of September 2024, a reduction from CN¥990.9m over a year. However, it does have CN¥2.67b in cash offsetting this, leading to net cash of CN¥2.17b.

How Healthy Is Zhejiang Jiuzhou Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Zhejiang Jiuzhou Pharmaceutical had liabilities of CN¥1.69b due within a year, and liabilities of CN¥700.2m falling due after that. Offsetting this, it had CN¥2.67b in cash and CN¥1.33b in receivables that were due within 12 months. So it can boast CN¥1.61b more liquid assets than total liabilities.

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

It is just as well that Zhejiang Jiuzhou Pharmaceutical's load is not too heavy, because its EBIT was down 42% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Jiuzhou 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 company can only pay off debt with cold hard cash, not accounting profits. While Zhejiang Jiuzhou 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. Looking at the most recent three years, Zhejiang Jiuzhou Pharmaceutical recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Jiuzhou Pharmaceutical has net cash of CN¥2.17b, as well as more liquid assets than liabilities. So we don't have any problem with Zhejiang Jiuzhou Pharmaceutical's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Zhejiang Jiuzhou Pharmaceutical you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.