We Think Zhejiang Jingxin Pharmaceutical (SZSE:002020) Can Stay On Top Of Its 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.' 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. We can see that Zhejiang Jingxin Pharmaceutical Co., Ltd. (SZSE:002020) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Zhejiang Jingxin Pharmaceutical

What Is Zhejiang Jingxin Pharmaceutical's Net Debt?

As you can see below, at the end of September 2023, Zhejiang Jingxin Pharmaceutical had CN¥369.9m of debt, up from CN¥248.5m a year ago. Click the image for more detail. But it also has CN¥1.42b in cash to offset that, meaning it has CN¥1.05b net cash.

A Look At Zhejiang Jingxin Pharmaceutical's Liabilities

According to the last reported balance sheet, Zhejiang Jingxin Pharmaceutical had liabilities of CN¥1.86b due within 12 months, and liabilities of CN¥377.4m due beyond 12 months. On the other hand, it had cash of CN¥1.42b and CN¥573.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥235.6m.

Of course, Zhejiang Jingxin Pharmaceutical has a market capitalization of CN¥9.37b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Zhejiang Jingxin Pharmaceutical also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Zhejiang Jingxin Pharmaceutical saw its EBIT drop by 3.1% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhejiang Jingxin 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zhejiang Jingxin Pharmaceutical may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Zhejiang Jingxin Pharmaceutical created free cash flow amounting to 15% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Zhejiang Jingxin Pharmaceutical has CN¥1.05b in net cash. So we are not troubled with Zhejiang Jingxin Pharmaceutical's debt use. 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 Zhejiang Jingxin Pharmaceutical is showing 2 warning signs in our investment analysis , 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.