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. We note that Jiangxi Fushine Pharmaceutical Co., Ltd. (SZSE:300497) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Jiangxi Fushine Pharmaceutical's Net Debt?

The chart below, which you can click on for greater detail, shows that Jiangxi Fushine Pharmaceutical had CN¥1.62b in debt in September 2024; about the same as the year before. However, it does have CN¥676.9m in cash offsetting this, leading to net debt of about CN¥941.6m.

How Healthy Is Jiangxi Fushine Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Jiangxi Fushine Pharmaceutical had liabilities of CN¥1.45b due within 12 months, and liabilities of CN¥808.9m due beyond 12 months. Offsetting this, it had CN¥676.9m in cash and CN¥548.5m in receivables that were due within 12 months. So its liabilities total CN¥1.04b more than the combination of its cash and short-term receivables.

Since publicly traded Jiangxi Fushine Pharmaceutical shares are worth a total of CN¥6.53b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Jiangxi Fushine 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.

In the last year Jiangxi Fushine Pharmaceutical had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥1.3b. To be frank that doesn't bode well.

Caveat Emptor

While Jiangxi Fushine Pharmaceutical's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥180m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥45m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 Fushine Pharmaceutical is showing 1 warning sign in our investment analysis , you should know about...

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.

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