Zhejiang Wolwo Bio-Pharmaceutical (SZSE:300357) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Zhejiang Wolwo Bio-Pharmaceutical Co., Ltd. (SZSE:300357) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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 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?

As you can see below, at the end of September 2024, Zhejiang Wolwo Bio-Pharmaceutical had CN¥37.2m of debt, up from CN¥14.7m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.25b in cash, leading to a CN¥1.21b net cash position.

A Look At Zhejiang Wolwo Bio-Pharmaceutical's Liabilities

The latest balance sheet data shows that Zhejiang Wolwo Bio-Pharmaceutical had liabilities of CN¥163.4m due within a year, and liabilities of CN¥68.3m falling due after that. On the other hand, it had cash of CN¥1.25b and CN¥324.2m worth of receivables due within a year. So it actually has CN¥1.34b more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Wolwo Bio-Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhejiang Wolwo Bio-Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

While Zhejiang Wolwo Bio-Pharmaceutical doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zhejiang Wolwo Bio-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. Looking at the most recent three years, Zhejiang Wolwo Bio-Pharmaceutical recorded free cash flow of 46% of its EBIT, which is weaker 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¥1.21b in net cash and a decent-looking balance sheet. So we are not troubled with Zhejiang Wolwo Bio-Pharmaceutical's debt use. 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. Be aware that Zhejiang Wolwo Bio-Pharmaceutical is showing 1 warning sign in our investment analysis , 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.