We Think Jiangsu Nhwa Pharmaceutical (SZSE:002262) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Jiangsu Nhwa Pharmaceutical Co., LTD (SZSE:002262) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jiangsu Nhwa Pharmaceutical

What Is Jiangsu Nhwa Pharmaceutical's Debt?

As you can see below, at the end of September 2024, Jiangsu Nhwa Pharmaceutical had CN¥65.2m of debt, up from CN¥30.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥3.85b in cash, so it actually has CN¥3.78b net cash.

How Healthy Is Jiangsu Nhwa Pharmaceutical's Balance Sheet?

We can see from the most recent balance sheet that Jiangsu Nhwa Pharmaceutical had liabilities of CN¥929.3m falling due within a year, and liabilities of CN¥95.4m due beyond that. On the other hand, it had cash of CN¥3.85b and CN¥1.37b worth of receivables due within a year. So it can boast CN¥4.19b 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. Simply put, the fact that Jiangsu Nhwa Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Jiangsu Nhwa Pharmaceutical grew its EBIT at 15% 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 ultimately the future profitability of the business will decide if Jiangsu Nhwa 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. 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 61% 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 we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Nhwa Pharmaceutical has net cash of CN¥3.78b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 15% in the last twelve months. So is Jiangsu Nhwa Pharmaceutical's debt a risk? It doesn't seem so to us. 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.

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.