David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Joincare Pharmaceutical Group Industry Co.,Ltd. (SHSE:600380) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Joincare Pharmaceutical Group IndustryLtd

How Much Debt Does Joincare Pharmaceutical Group IndustryLtd Carry?

As you can see below, at the end of June 2022, Joincare Pharmaceutical Group IndustryLtd had CN¥4.46b of debt, up from CN¥2.40b a year ago. Click the image for more detail. However, it does have CN¥12.8b in cash offsetting this, leading to net cash of CN¥8.30b.

How Healthy Is Joincare Pharmaceutical Group IndustryLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Joincare Pharmaceutical Group IndustryLtd had liabilities of CN¥8.92b due within 12 months and liabilities of CN¥3.16b due beyond that. On the other hand, it had cash of CN¥12.8b and CN¥4.83b worth of receivables due within a year. So it actually has CN¥5.51b more liquid assets than total liabilities.

This luscious liquidity implies that Joincare Pharmaceutical Group IndustryLtd's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Joincare Pharmaceutical Group IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Joincare Pharmaceutical Group IndustryLtd grew its EBIT at 11% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Joincare Pharmaceutical Group IndustryLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Joincare Pharmaceutical Group IndustryLtd 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, Joincare Pharmaceutical Group IndustryLtd produced sturdy free cash flow equating to 72% 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 we empathize with investors who find debt concerning, you should keep in mind that Joincare Pharmaceutical Group IndustryLtd has net cash of CN¥8.30b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.1b, being 72% of its EBIT. So we don't think Joincare Pharmaceutical Group IndustryLtd's use of debt is risky. 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. We've identified 1 warning sign with Joincare Pharmaceutical Group IndustryLtd , and understanding them should be part of your investment process.

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.