Is Dizal (Jiangsu) Pharmaceutical (SHSE:688192) Using Too Much 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. Importantly, Dizal (Jiangsu) Pharmaceutical Co., Ltd. (SHSE:688192) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dizal (Jiangsu) Pharmaceutical

What Is Dizal (Jiangsu) Pharmaceutical's Debt?

As you can see below, at the end of September 2024, Dizal (Jiangsu) Pharmaceutical had CN¥819.6m of debt, up from CN¥199.9m a year ago. Click the image for more detail. However, it does have CN¥808.3m in cash offsetting this, leading to net debt of about CN¥11.3m.

A Look At Dizal (Jiangsu) Pharmaceutical's Liabilities

According to the last reported balance sheet, Dizal (Jiangsu) Pharmaceutical had liabilities of CN¥566.9m due within 12 months, and liabilities of CN¥638.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥808.3m as well as receivables valued at CN¥80.9m due within 12 months. So it has liabilities totalling CN¥316.0m more than its cash and near-term receivables, combined.

This state of affairs indicates that Dizal (Jiangsu) Pharmaceutical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥17.2b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Dizal (Jiangsu) Pharmaceutical has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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.

Over 12 months, Dizal (Jiangsu) Pharmaceutical reported revenue of CN¥390m, which is a gain of 872%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Dizal (Jiangsu) Pharmaceutical still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥955m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥862m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 2 warning signs for Dizal (Jiangsu) Pharmaceutical you should know about.

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.