Zhejiang Xianju PharmaceuticalLtd (SZSE:002332) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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. As with many other companies Zhejiang Xianju Pharmaceutical Co.,Ltd. (SZSE:002332) makes use of debt. But is this debt a concern to shareholders?

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. 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. 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.

Check out our latest analysis for Zhejiang Xianju PharmaceuticalLtd

What Is Zhejiang Xianju PharmaceuticalLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Zhejiang Xianju PharmaceuticalLtd had debt of CN¥167.6m at the end of June 2024, a reduction from CN¥261.2m over a year. However, its balance sheet shows it holds CN¥1.31b in cash, so it actually has CN¥1.14b net cash.

A Look At Zhejiang Xianju PharmaceuticalLtd's Liabilities

The latest balance sheet data shows that Zhejiang Xianju PharmaceuticalLtd had liabilities of CN¥993.2m due within a year, and liabilities of CN¥106.2m falling due after that. Offsetting these obligations, it had cash of CN¥1.31b as well as receivables valued at CN¥887.5m due within 12 months. So it actually has CN¥1.10b more liquid assets than total liabilities.

This surplus suggests that Zhejiang Xianju PharmaceuticalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang Xianju PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Zhejiang Xianju PharmaceuticalLtd saw its EBIT decline by 3.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhejiang Xianju PharmaceuticalLtd'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, a company can only pay off debt with cold hard cash, not accounting profits. While Zhejiang Xianju PharmaceuticalLtd 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. Looking at the most recent three years, Zhejiang Xianju PharmaceuticalLtd recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Xianju PharmaceuticalLtd has net cash of CN¥1.14b, as well as more liquid assets than liabilities. So we don't have any problem with Zhejiang Xianju PharmaceuticalLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Zhejiang Xianju PharmaceuticalLtd that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.