Nanjing King-Friend Biochemical PharmaceuticalLtd (SHSE:603707) Is Making Moderate Use Of Debt

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.' 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. As with many other companies Nanjing King-Friend Biochemical Pharmaceutical Co.,Ltd. (SHSE:603707) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nanjing King-Friend Biochemical PharmaceuticalLtd

How Much Debt Does Nanjing King-Friend Biochemical PharmaceuticalLtd Carry?

As you can see below, Nanjing King-Friend Biochemical PharmaceuticalLtd had CN¥2.72b of debt at March 2024, down from CN¥3.35b a year prior. However, it does have CN¥2.16b in cash offsetting this, leading to net debt of about CN¥559.9m.

A Look At Nanjing King-Friend Biochemical PharmaceuticalLtd's Liabilities

According to the last reported balance sheet, Nanjing King-Friend Biochemical PharmaceuticalLtd had liabilities of CN¥3.02b due within 12 months, and liabilities of CN¥638.7m due beyond 12 months. On the other hand, it had cash of CN¥2.16b and CN¥1.13b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥367.5m.

Having regard to Nanjing King-Friend Biochemical PharmaceuticalLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥19.2b company is short on cash, but still worth keeping an eye on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nanjing King-Friend Biochemical PharmaceuticalLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Nanjing King-Friend Biochemical PharmaceuticalLtd had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to CN¥3.6b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Nanjing King-Friend Biochemical PharmaceuticalLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥553m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥345m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Nanjing King-Friend Biochemical PharmaceuticalLtd that you should be aware of before investing here.

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.

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