Health Check: How Prudently Does Dizal (Jiangsu) Pharmaceutical (SHSE:688192) Use 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Dizal (Jiangsu) Pharmaceutical Co., Ltd. (SHSE:688192) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Dizal (Jiangsu) Pharmaceutical

What Is Dizal (Jiangsu) Pharmaceutical's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Dizal (Jiangsu) Pharmaceutical had debt of CN¥521.4m, up from none in one year. However, it does have CN¥816.9m in cash offsetting this, leading to net cash of CN¥295.5m.

How Strong Is Dizal (Jiangsu) Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Dizal (Jiangsu) Pharmaceutical had liabilities of CN¥544.7m due within 12 months, and liabilities of CN¥310.9m due beyond 12 months. On the other hand, it had cash of CN¥816.9m and CN¥44.1m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Dizal (Jiangsu) Pharmaceutical's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥15.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Dizal (Jiangsu) Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Dizal (Jiangsu) Pharmaceutical'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 Dizal (Jiangsu) Pharmaceutical managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Dizal (Jiangsu) Pharmaceutical?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Dizal (Jiangsu) Pharmaceutical had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥929m of cash and made a loss of CN¥1.1b. With only CN¥295.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 3 warning signs with Dizal (Jiangsu) Pharmaceutical , and understanding them should be part of your investment process.

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.