Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, JiangXi Tianxin Pharmaceutical Co., Ltd. (SHSE:603235) does carry 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. If things get really bad, the lenders can take control of the business. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is JiangXi Tianxin Pharmaceutical's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 JiangXi Tianxin Pharmaceutical had CN¥220.0m of debt, an increase on none, over one year. But it also has CN¥2.38b in cash to offset that, meaning it has CN¥2.16b net cash.

A Look At JiangXi Tianxin Pharmaceutical's Liabilities

Zooming in on the latest balance sheet data, we can see that JiangXi Tianxin Pharmaceutical had liabilities of CN¥508.9m due within 12 months and liabilities of CN¥386.2m due beyond that. On the other hand, it had cash of CN¥2.38b and CN¥353.5m worth of receivables due within a year. So it can boast CN¥1.84b more liquid assets than total liabilities.

This surplus suggests that JiangXi Tianxin Pharmaceutical is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that JiangXi Tianxin Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, JiangXi Tianxin Pharmaceutical's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is JiangXi Tianxin Pharmaceutical'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While JiangXi Tianxin 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. During the last three years, JiangXi Tianxin Pharmaceutical produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case JiangXi Tianxin Pharmaceutical has CN¥2.16b in net cash and a decent-looking balance sheet. So we are not troubled with JiangXi Tianxin Pharmaceutical's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that JiangXi Tianxin Pharmaceutical is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

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.