Jinghua Pharmaceutical Group (SZSE:002349) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Jinghua Pharmaceutical Group Co., Ltd. (SZSE:002349) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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.

View our latest analysis for Jinghua Pharmaceutical Group

How Much Debt Does Jinghua Pharmaceutical Group Carry?

The image below, which you can click on for greater detail, shows that Jinghua Pharmaceutical Group had debt of CN¥14.9m at the end of September 2024, a reduction from CN¥21.0m over a year. But it also has CN¥1.34b in cash to offset that, meaning it has CN¥1.32b net cash.

How Healthy Is Jinghua Pharmaceutical Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jinghua Pharmaceutical Group had liabilities of CN¥306.2m due within 12 months and liabilities of CN¥18.4m due beyond that. Offsetting these obligations, it had cash of CN¥1.34b as well as receivables valued at CN¥427.4m due within 12 months. So it actually has CN¥1.44b more liquid assets than total liabilities.

It's good to see that Jinghua Pharmaceutical Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Jinghua Pharmaceutical Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Jinghua Pharmaceutical Group 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 it is Jinghua Pharmaceutical Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jinghua Pharmaceutical Group 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. Happily for any shareholders, Jinghua Pharmaceutical Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jinghua Pharmaceutical Group has CN¥1.32b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥245m, being 102% of its EBIT. So we don't think Jinghua Pharmaceutical Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Jinghua Pharmaceutical Group that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.