Is Dizal (Jiangsu) Pharmaceutical (SHSE:688192) Using Too Much 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.' 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. We can see that Dizal (Jiangsu) Pharmaceutical Co., Ltd. (SHSE:688192) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Dizal (Jiangsu) Pharmaceutical

How Much Debt Does Dizal (Jiangsu) Pharmaceutical Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Dizal (Jiangsu) Pharmaceutical had debt of CN¥540.5m, up from none in one year. However, it does have CN¥816.9m in cash offsetting this, leading to net cash of CN¥276.4m.

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

Zooming in on the latest balance sheet data, we can see that Dizal (Jiangsu) Pharmaceutical had liabilities of CN¥544.7m due within 12 months and liabilities of CN¥310.9m due beyond that. Offsetting these obligations, it had cash of CN¥816.9m as well as receivables valued at CN¥47.5m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Dizal (Jiangsu) Pharmaceutical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥18.7b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Dizal (Jiangsu) Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Dizal (Jiangsu) Pharmaceutical turned things around in the last 12 months, delivering and EBIT of CN¥1.3b. 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 Dizal (Jiangsu) 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 Dizal (Jiangsu) 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. During the last year, Dizal (Jiangsu) Pharmaceutical burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dizal (Jiangsu) Pharmaceutical has net cash of CN¥276.4m, as well as more liquid assets than liabilities. So we don't have any problem with Dizal (Jiangsu) 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. Be aware that Dizal (Jiangsu) Pharmaceutical is showing 2 warning signs in our investment analysis , you should know about...

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.

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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.