These 4 Measures Indicate That Zhejiang Wolwo Bio-Pharmaceutical (SZSE:300357) Is Using Debt Reasonably Well

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.' 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. We note that Zhejiang Wolwo Bio-Pharmaceutical Co., Ltd. (SZSE:300357) 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?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zhejiang Wolwo Bio-Pharmaceutical

How Much Debt Does Zhejiang Wolwo Bio-Pharmaceutical Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Zhejiang Wolwo Bio-Pharmaceutical had debt of CN¥44.4m, up from CN¥27.3m in one year. However, it does have CN¥1.32b in cash offsetting this, leading to net cash of CN¥1.27b.

How Healthy Is Zhejiang Wolwo Bio-Pharmaceutical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Wolwo Bio-Pharmaceutical had liabilities of CN¥248.6m due within 12 months and liabilities of CN¥78.1m due beyond that. Offsetting this, it had CN¥1.32b in cash and CN¥249.6m in receivables that were due within 12 months. So it can boast CN¥1.24b more liquid assets than total liabilities.

This surplus suggests that Zhejiang Wolwo Bio-Pharmaceutical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang Wolwo Bio-Pharmaceutical 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 Wolwo Bio-Pharmaceutical saw its EBIT decline by 7.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Wolwo Bio-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, a company can only pay off debt with cold hard cash, not accounting profits. Zhejiang Wolwo Bio-Pharmaceutical 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. In the last three years, Zhejiang Wolwo Bio-Pharmaceutical's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Wolwo Bio-Pharmaceutical has CN¥1.27b in net cash and a decent-looking balance sheet. So we don't have any problem with Zhejiang Wolwo Bio-Pharmaceutical's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Zhejiang Wolwo Bio-Pharmaceutical you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.