Health Check: How Prudently Does Jilin Aodong Pharmaceutical Group (SZSE:000623) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Jilin Aodong Pharmaceutical Group Co., Ltd. (SZSE:000623) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Jilin Aodong Pharmaceutical Group

What Is Jilin Aodong Pharmaceutical Group's Debt?

The image below, which you can click on for greater detail, shows that Jilin Aodong Pharmaceutical Group had debt of CN¥2.13b at the end of September 2024, a reduction from CN¥3.16b over a year. However, its balance sheet shows it holds CN¥2.97b in cash, so it actually has CN¥834.0m net cash.

A Look At Jilin Aodong Pharmaceutical Group's Liabilities

According to the last reported balance sheet, Jilin Aodong Pharmaceutical Group had liabilities of CN¥2.36b due within 12 months, and liabilities of CN¥1.28b due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.97b as well as receivables valued at CN¥1.21b due within 12 months. So it can boast CN¥543.7m more liquid assets than total liabilities.

This surplus suggests that Jilin Aodong Pharmaceutical Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jilin Aodong Pharmaceutical Group boasts net cash, 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 you can't view debt in total isolation; since Jilin Aodong Pharmaceutical Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Jilin Aodong Pharmaceutical Group made a loss at the EBIT level, and saw its revenue drop to CN¥3.0b, which is a fall of 9.2%. That's not what we would hope to see.

So How Risky Is Jilin Aodong Pharmaceutical Group?

Although Jilin Aodong Pharmaceutical Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥1.4b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 1 warning sign for Jilin Aodong Pharmaceutical Group you should be aware of.

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.