We Think Hunan Jiudian Pharmaceutical (SZSE:300705) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Hunan Jiudian Pharmaceutical Co., Ltd. (SZSE:300705) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Hunan Jiudian Pharmaceutical

What Is Hunan Jiudian Pharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that Hunan Jiudian Pharmaceutical had debt of CN¥367.3m at the end of September 2024, a reduction from CN¥633.3m over a year. However, its balance sheet shows it holds CN¥710.0m in cash, so it actually has CN¥342.7m net cash.

A Look At Hunan Jiudian Pharmaceutical's Liabilities

Zooming in on the latest balance sheet data, we can see that Hunan Jiudian Pharmaceutical had liabilities of CN¥377.7m due within 12 months and liabilities of CN¥479.9m due beyond that. Offsetting this, it had CN¥710.0m in cash and CN¥526.3m in receivables that were due within 12 months. So it can boast CN¥378.7m more liquid assets than total liabilities.

This surplus suggests that Hunan Jiudian Pharmaceutical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hunan Jiudian Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Hunan Jiudian Pharmaceutical has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hunan Jiudian Pharmaceutical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hunan Jiudian 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, Hunan Jiudian Pharmaceutical recorded free cash flow of 20% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hunan Jiudian Pharmaceutical has net cash of CN¥342.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 37% year-on-year EBIT growth. So is Hunan Jiudian Pharmaceutical's debt a risk? It doesn't seem so to us. 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 Hunan Jiudian Pharmaceutical that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.