The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Zhejiang Jingxin Pharmaceutical Co., Ltd. (SZSE:002020) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Zhejiang Jingxin Pharmaceutical's Debt?

As you can see below, at the end of March 2024, Zhejiang Jingxin Pharmaceutical had CN¥332.0m of debt, up from CN¥239.8m a year ago. Click the image for more detail. However, it does have CN¥2.18b in cash offsetting this, leading to net cash of CN¥1.85b.

How Strong Is Zhejiang Jingxin Pharmaceutical's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Jingxin Pharmaceutical had liabilities of CN¥2.25b falling due within a year, and liabilities of CN¥369.1m due beyond that. Offsetting these obligations, it had cash of CN¥2.18b as well as receivables valued at CN¥607.6m due within 12 months. So it can boast CN¥171.6m more liquid assets than total liabilities.

This state of affairs indicates that Zhejiang Jingxin Pharmaceutical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥9.22b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Zhejiang Jingxin Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Zhejiang Jingxin Pharmaceutical saw its EBIT decline by 6.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhejiang Jingxin Pharmaceutical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhejiang Jingxin 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. In the last three years, Zhejiang Jingxin Pharmaceutical's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Jingxin Pharmaceutical has CN¥1.85b in net cash and a decent-looking balance sheet. So we don't have any problem with Zhejiang Jingxin Pharmaceutical's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Zhejiang Jingxin Pharmaceutical's earnings per share history for free.

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.

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