Jiangsu Nhwa Pharmaceutical (SZSE:002262) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Jiangsu Nhwa Pharmaceutical Co., LTD (SZSE:002262) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jiangsu Nhwa Pharmaceutical

How Much Debt Does Jiangsu Nhwa Pharmaceutical Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangsu Nhwa Pharmaceutical had debt of CN¥65.2m, up from CN¥45.2m in one year. But it also has CN¥3.67b in cash to offset that, meaning it has CN¥3.60b net cash.

How Strong Is Jiangsu Nhwa Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Jiangsu Nhwa Pharmaceutical had liabilities of CN¥823.5m due within a year, and liabilities of CN¥105.7m falling due after that. On the other hand, it had cash of CN¥3.67b and CN¥1.19b worth of receivables due within a year. So it actually has CN¥3.92b more liquid assets than total liabilities.

This excess liquidity suggests that Jiangsu Nhwa Pharmaceutical is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble 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!

Also good is that Jiangsu Nhwa Pharmaceutical grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jiangsu Nhwa Pharmaceutical's ability to maintain a healthy balance sheet going forward. 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. 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 56% 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¥3.60b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 17% over the last year. So is Jiangsu Nhwa 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 Jiangsu Nhwa Pharmaceutical's earnings per share history for free.

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.

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