Hangzhou Jiuyuan Genetic Biopharmaceutical (HKG:2566) Seems To Use Debt Quite Sensibly

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.' 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. We can see that Hangzhou Jiuyuan Genetic Biopharmaceutical Co., Ltd. (HKG:2566) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Hangzhou Jiuyuan Genetic Biopharmaceutical Carry?

The image below, which you can click on for greater detail, shows that Hangzhou Jiuyuan Genetic Biopharmaceutical had debt of CN¥137.1m at the end of June 2025, a reduction from CN¥206.3m over a year. But it also has CN¥586.9m in cash to offset that, meaning it has CN¥449.8m net cash.

A Look At Hangzhou Jiuyuan Genetic Biopharmaceutical's Liabilities

Zooming in on the latest balance sheet data, we can see that Hangzhou Jiuyuan Genetic Biopharmaceutical had liabilities of CN¥322.8m due within 12 months and liabilities of CN¥120.6m due beyond that. Offsetting these obligations, it had cash of CN¥586.9m as well as receivables valued at CN¥690.0m due within 12 months. So it actually has CN¥833.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Hangzhou Jiuyuan Genetic Biopharmaceutical's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Hangzhou Jiuyuan Genetic Biopharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Hangzhou Jiuyuan Genetic Biopharmaceutical

On the other hand, Hangzhou Jiuyuan Genetic Biopharmaceutical's EBIT dived 18%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hangzhou Jiuyuan Genetic Biopharmaceutical's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hangzhou Jiuyuan Genetic Biopharmaceutical 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. In the last three years, Hangzhou Jiuyuan Genetic Biopharmaceutical's free cash flow amounted to 31% of its EBIT, less 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 Hangzhou Jiuyuan Genetic Biopharmaceutical has CN¥449.8m in net cash and a decent-looking balance sheet. So we are not troubled with Hangzhou Jiuyuan Genetic Biopharmaceutical'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. For example, we've discovered 1 warning sign for Hangzhou Jiuyuan Genetic Biopharmaceutical that you should be aware of before investing here.

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.