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, Jianmin Pharmaceutical Group Co.,Ltd. (SHSE:600976) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jianmin Pharmaceutical GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Jianmin Pharmaceutical GroupLtd had debt of CN¥84.4m, up from CN¥78.5m in one year. But it also has CN¥943.1m in cash to offset that, meaning it has CN¥858.7m net cash.

How Strong Is Jianmin Pharmaceutical GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jianmin Pharmaceutical GroupLtd had liabilities of CN¥1.90b due within 12 months and liabilities of CN¥72.3m due beyond that. Offsetting this, it had CN¥943.1m in cash and CN¥1.35b in receivables that were due within 12 months. So it actually has CN¥313.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Jianmin Pharmaceutical GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jianmin Pharmaceutical GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Jianmin Pharmaceutical GroupLtd grew its EBIT by 9.0% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jianmin Pharmaceutical GroupLtd 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. Jianmin Pharmaceutical GroupLtd 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. During the last three years, Jianmin Pharmaceutical GroupLtd produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jianmin Pharmaceutical GroupLtd has CN¥858.7m in net cash and a decent-looking balance sheet. So is Jianmin Pharmaceutical GroupLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Jianmin Pharmaceutical GroupLtd (1 is potentially serious) you should be aware of.

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.