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.' 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 Zhejiang Jingxin Pharmaceutical Co., Ltd. (SZSE:002020) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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.

View our latest analysis for Zhejiang Jingxin Pharmaceutical

What Is Zhejiang Jingxin Pharmaceutical's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Zhejiang Jingxin Pharmaceutical had debt of CN¥462.0m, up from CN¥370.3m in one year. However, its balance sheet shows it holds CN¥1.27b in cash, so it actually has CN¥809.4m net cash.

A Look At Zhejiang Jingxin Pharmaceutical's Liabilities

According to the last reported balance sheet, Zhejiang Jingxin Pharmaceutical had liabilities of CN¥2.41b due within 12 months, and liabilities of CN¥366.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.27b as well as receivables valued at CN¥813.1m due within 12 months. So its liabilities total CN¥693.1m more than the combination of its cash and short-term receivables.

Given Zhejiang Jingxin Pharmaceutical has a market capitalization of CN¥11.0b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

Zhejiang Jingxin Pharmaceutical's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Zhejiang Jingxin Pharmaceutical produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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¥809.4m in net cash. So we don't have any problem with Zhejiang Jingxin Pharmaceutical's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Zhejiang Jingxin Pharmaceutical is showing 1 warning sign 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.