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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Joincare Pharmaceutical Group Industry Co.,Ltd. (SHSE:600380) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Joincare Pharmaceutical Group IndustryLtd

What Is Joincare Pharmaceutical Group IndustryLtd's Debt?

As you can see below, at the end of September 2023, Joincare Pharmaceutical Group IndustryLtd had CN¥5.79b of debt, up from CN¥5.40b a year ago. Click the image for more detail. However, it does have CN¥14.8b in cash offsetting this, leading to net cash of CN¥9.06b.

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

According to the last reported balance sheet, Joincare Pharmaceutical Group IndustryLtd had liabilities of CN¥8.98b due within 12 months, and liabilities of CN¥4.70b due beyond 12 months. Offsetting this, it had CN¥14.8b in cash and CN¥5.09b in receivables that were due within 12 months. So it can boast CN¥6.26b more liquid assets than total liabilities.

This surplus suggests that Joincare Pharmaceutical Group IndustryLtd is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Joincare Pharmaceutical Group IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Joincare Pharmaceutical Group IndustryLtd has increased its EBIT by 6.5% over twelve months, which should ease any concerns about debt repayment. 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'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. 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. Over the most recent three years, Joincare Pharmaceutical Group IndustryLtd recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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¥9.06b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.9b, being 79% of its EBIT. So we don't think Joincare Pharmaceutical Group IndustryLtd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Joincare Pharmaceutical Group IndustryLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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.