Jiangsu Nhwa Pharmaceutical (SZSE:002262) Has A Rock Solid Balance Sheet

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.' 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, Jiangsu Nhwa Pharmaceutical Co., LTD (SZSE:002262) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jiangsu Nhwa Pharmaceutical

What Is Jiangsu Nhwa Pharmaceutical's Debt?

As you can see below, at the end of June 2024, Jiangsu Nhwa Pharmaceutical had CN¥85.2m of debt, up from CN¥30.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥3.52b in cash, leading to a CN¥3.44b net cash position.

How Strong Is Jiangsu Nhwa Pharmaceutical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Nhwa Pharmaceutical had liabilities of CN¥828.7m due within 12 months and liabilities of CN¥99.4m due beyond that. On the other hand, it had cash of CN¥3.52b and CN¥1.36b worth of receivables due within a year. So it can boast CN¥3.96b more liquid assets than total liabilities.

This surplus suggests that Jiangsu Nhwa Pharmaceutical is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Jiangsu Nhwa Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Jiangsu Nhwa Pharmaceutical grew its EBIT by 17% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Nhwa Pharmaceutical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiangsu Nhwa Pharmaceutical has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Jiangsu Nhwa Pharmaceutical produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Nhwa Pharmaceutical has net cash of CN¥3.44b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 17% over the last year. So we don't think Jiangsu Nhwa Pharmaceutical's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Jiangsu Nhwa Pharmaceutical, you may well want to click here to check an interactive graph of its earnings per share history.

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.