These 4 Measures Indicate That Zhejiang Jolly PharmaceuticalLTD (SZSE:300181) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Zhejiang Jolly Pharmaceutical Co.,LTD (SZSE:300181) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Zhejiang Jolly PharmaceuticalLTD

What Is Zhejiang Jolly PharmaceuticalLTD's Debt?

The chart below, which you can click on for greater detail, shows that Zhejiang Jolly PharmaceuticalLTD had CN¥240.7m in debt in June 2024; about the same as the year before. But it also has CN¥925.9m in cash to offset that, meaning it has CN¥685.2m net cash.

How Strong Is Zhejiang Jolly PharmaceuticalLTD's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Jolly PharmaceuticalLTD had liabilities of CN¥1.12b falling due within a year, and liabilities of CN¥50.7m due beyond that. Offsetting this, it had CN¥925.9m in cash and CN¥864.7m in receivables that were due within 12 months. So it actually has CN¥615.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Jolly PharmaceuticalLTD could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zhejiang Jolly PharmaceuticalLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Zhejiang Jolly PharmaceuticalLTD grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhejiang Jolly PharmaceuticalLTD 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhejiang Jolly 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 Jolly PharmaceuticalLTD recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Jolly PharmaceuticalLTD has CN¥685.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 41% year-on-year EBIT growth. So is Zhejiang Jolly PharmaceuticalLTD's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Zhejiang Jolly PharmaceuticalLTD that you should be aware of before investing here.

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.