Would Nanjing King-Friend Biochemical PharmaceuticalLtd (SHSE:603707) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nanjing King-Friend Biochemical PharmaceuticalLtd

What Is Nanjing King-Friend Biochemical PharmaceuticalLtd's Net Debt?

As you can see below, Nanjing King-Friend Biochemical PharmaceuticalLtd had CN¥2.68b of debt at June 2024, down from CN¥3.25b a year prior. However, it does have CN¥2.24b in cash offsetting this, leading to net debt of about CN¥438.7m.

How Strong Is Nanjing King-Friend Biochemical PharmaceuticalLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nanjing King-Friend Biochemical PharmaceuticalLtd had liabilities of CN¥3.08b due within 12 months and liabilities of CN¥637.4m due beyond that. On the other hand, it had cash of CN¥2.24b and CN¥1.31b worth of receivables due within a year. So it has liabilities totalling CN¥170.3m more than its cash and near-term receivables, combined.

This state of affairs indicates that Nanjing King-Friend Biochemical PharmaceuticalLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥21.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Nanjing King-Friend Biochemical PharmaceuticalLtd 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.

In the last year Nanjing King-Friend Biochemical PharmaceuticalLtd had a loss before interest and tax, and actually shrunk its revenue by 6.7%, to CN¥3.8b. That's not what we would hope to see.

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¥531m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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¥409m. So to be blunt we do think it is risky. 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. Be aware that Nanjing King-Friend Biochemical PharmaceuticalLtd is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.