Zhejiang Jingxin Pharmaceutical (SZSE:002020) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Zhejiang Jingxin Pharmaceutical Co., Ltd. (SZSE:002020) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Zhejiang Jingxin Pharmaceutical

How Much Debt Does Zhejiang Jingxin Pharmaceutical Carry?

As you can see below, Zhejiang Jingxin Pharmaceutical had CN¥363.8m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.11b in cash offsetting this, leading to net cash of CN¥745.7m.

A Look At Zhejiang Jingxin Pharmaceutical's Liabilities

According to the last reported balance sheet, Zhejiang Jingxin Pharmaceutical had liabilities of CN¥2.36b due within 12 months, and liabilities of CN¥360.4m due beyond 12 months. Offsetting this, it had CN¥1.11b in cash and CN¥938.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥675.1m.

Since publicly traded Zhejiang Jingxin Pharmaceutical shares are worth a total of CN¥10.6b, it seems unlikely that this level of liabilities would be a major threat. 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.

And we also note warmly that Zhejiang Jingxin Pharmaceutical grew its EBIT by 11% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept 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. Over the most recent three years, Zhejiang Jingxin Pharmaceutical recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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¥745.7m in net cash. And it also grew its EBIT by 11% over the last year. So is Zhejiang Jingxin Pharmaceutical's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Zhejiang Jingxin Pharmaceutical's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.