Is Zhejiang Garden BiopharmaceuticalLtd (SZSE:300401) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Zhejiang Garden Biopharmaceutical Co.,Ltd. (SZSE:300401) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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.

View our latest analysis for Zhejiang Garden BiopharmaceuticalLtd

What Is Zhejiang Garden BiopharmaceuticalLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang Garden BiopharmaceuticalLtd had debt of CN¥1.57b, up from CN¥1.50b in one year. However, it does have CN¥1.72b in cash offsetting this, leading to net cash of CN¥150.2m.

A Look At Zhejiang Garden BiopharmaceuticalLtd's Liabilities

According to the last reported balance sheet, Zhejiang Garden BiopharmaceuticalLtd had liabilities of CN¥1.41b due within 12 months, and liabilities of CN¥1.11b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.72b as well as receivables valued at CN¥133.4m due within 12 months. So its liabilities total CN¥657.4m more than the combination of its cash and short-term receivables.

Since publicly traded Zhejiang Garden BiopharmaceuticalLtd shares are worth a total of CN¥6.30b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Zhejiang Garden BiopharmaceuticalLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Zhejiang Garden BiopharmaceuticalLtd's saving grace is its low debt levels, because its EBIT has tanked 39% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhejiang Garden BiopharmaceuticalLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhejiang Garden BiopharmaceuticalLtd 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. Over the last three years, Zhejiang Garden BiopharmaceuticalLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Zhejiang Garden BiopharmaceuticalLtd does have more liabilities than liquid assets, it also has net cash of CN¥150.2m. So while Zhejiang Garden BiopharmaceuticalLtd does not have a great balance sheet, it's certainly not too bad. 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 instance, we've identified 2 warning signs for Zhejiang Garden BiopharmaceuticalLtd (1 is a bit unpleasant) you should be aware of.

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.