Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies JiangSu WuZhong Pharmaceutical Development Co., Ltd. (SHSE:600200) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does JiangSu WuZhong Pharmaceutical Development Carry?

As you can see below, JiangSu WuZhong Pharmaceutical Development had CN¥1.77b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.78b in cash offsetting this, leading to net cash of CN¥10.2m.

A Look At JiangSu WuZhong Pharmaceutical Development's Liabilities

The latest balance sheet data shows that JiangSu WuZhong Pharmaceutical Development had liabilities of CN¥2.01b due within a year, and liabilities of CN¥276.5m falling due after that. Offsetting these obligations, it had cash of CN¥1.78b as well as receivables valued at CN¥1.01b due within 12 months. So it can boast CN¥507.6m more liquid assets than total liabilities.

This surplus suggests that JiangSu WuZhong Pharmaceutical Development has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that JiangSu WuZhong Pharmaceutical Development has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if JiangSu WuZhong Pharmaceutical Development 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.

Over 12 months, JiangSu WuZhong Pharmaceutical Development saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is JiangSu WuZhong Pharmaceutical Development?

Although JiangSu WuZhong Pharmaceutical Development had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥17m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like JiangSu WuZhong Pharmaceutical Development I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.