Is Jiangxi Fushine Pharmaceutical (SZSE:300497) A Risky Investment?

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 can see that Jiangxi Fushine Pharmaceutical Co., Ltd. (SZSE:300497) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jiangxi Fushine Pharmaceutical

What Is Jiangxi Fushine Pharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Jiangxi Fushine Pharmaceutical had debt of CN¥1.63b, up from CN¥1.42b in one year. On the flip side, it has CN¥731.6m in cash leading to net debt of about CN¥895.3m.

How Healthy Is Jiangxi Fushine Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Jiangxi Fushine Pharmaceutical had liabilities of CN¥1.29b due within 12 months, and liabilities of CN¥1.06b due beyond 12 months. Offsetting this, it had CN¥731.6m in cash and CN¥615.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.00b.

Of course, Jiangxi Fushine Pharmaceutical has a market capitalization of CN¥5.19b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Jiangxi Fushine Pharmaceutical's earnings that will influence how the balance sheet holds up in the future. 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 Jiangxi Fushine Pharmaceutical had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to CN¥1.6b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Jiangxi Fushine Pharmaceutical produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥132m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥307m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jiangxi Fushine Pharmaceutical you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.