Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Hubei Jumpcan Pharmaceutical Co., Ltd. (SHSE:600566) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Hubei Jumpcan Pharmaceutical's Net Debt?

As you can see below, at the end of September 2024, Hubei Jumpcan Pharmaceutical had CN¥1.22b of debt, up from CN¥839.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥11.7b in cash, leading to a CN¥10.5b net cash position.

How Healthy Is Hubei Jumpcan Pharmaceutical's Balance Sheet?

We can see from the most recent balance sheet that Hubei Jumpcan Pharmaceutical had liabilities of CN¥3.85b falling due within a year, and liabilities of CN¥202.8m due beyond that. Offsetting these obligations, it had cash of CN¥11.7b as well as receivables valued at CN¥1.93b due within 12 months. So it actually has CN¥9.58b more liquid assets than total liabilities.

This surplus strongly suggests that Hubei Jumpcan Pharmaceutical has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Hubei Jumpcan Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Hubei Jumpcan Pharmaceutical grew its EBIT by 5.7% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hubei Jumpcan 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hubei Jumpcan Pharmaceutical may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Hubei Jumpcan Pharmaceutical actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hubei Jumpcan Pharmaceutical has net cash of CN¥10.5b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.1b, being 101% of its EBIT. So is Hubei Jumpcan Pharmaceutical's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hubei Jumpcan Pharmaceutical you should know about.

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.