Does Fujian Cosunter Pharmaceutical (SZSE:300436) Have A Healthy Balance Sheet?

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. Importantly, Fujian Cosunter Pharmaceutical Co., Ltd. (SZSE:300436) does carry debt. But the real question is whether this debt is making the company risky.

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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fujian Cosunter Pharmaceutical

What Is Fujian Cosunter Pharmaceutical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Fujian Cosunter Pharmaceutical had CN¥436.6m of debt in June 2024, down from CN¥463.5m, one year before. However, it does have CN¥131.1m in cash offsetting this, leading to net debt of about CN¥305.5m.

How Strong Is Fujian Cosunter Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Fujian Cosunter Pharmaceutical had liabilities of CN¥522.8m due within 12 months, and liabilities of CN¥455.9m due beyond 12 months. On the other hand, it had cash of CN¥131.1m and CN¥92.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥755.7m.

Fujian Cosunter Pharmaceutical has a market capitalization of CN¥3.69b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fujian Cosunter Pharmaceutical 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.

In the last year Fujian Cosunter Pharmaceutical wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to CN¥463m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Fujian Cosunter Pharmaceutical still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥121m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥120m in negative free cash flow over the last twelve months. So to be blunt we think it 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 3 warning signs for Fujian Cosunter Pharmaceutical that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.