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. Importantly, Jiangxi Fushine Pharmaceutical Co., Ltd. (SZSE:300497) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

As you can see below, at the end of December 2023, Jiangxi Fushine Pharmaceutical had CN¥1.63b of debt, up from CN¥1.42b a year ago. Click the image for more detail. However, it does have CN¥731.6m in cash offsetting this, leading to net debt of about CN¥895.3m.

How Strong Is Jiangxi Fushine Pharmaceutical's Balance Sheet?

We can see from the most recent balance sheet that Jiangxi Fushine Pharmaceutical had liabilities of CN¥1.29b falling due within a year, and liabilities of CN¥1.06b due beyond that. Offsetting these obligations, it had cash of CN¥731.6m as well as receivables valued at CN¥615.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.00b.

Of course, Jiangxi Fushine Pharmaceutical has a market capitalization of CN¥5.39b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Jiangxi Fushine Pharmaceutical made a loss at the EBIT level, and saw its revenue drop to CN¥1.6b, which is a fall of 2.3%. We would much prefer see growth.

Caveat Emptor

Importantly, Jiangxi Fushine Pharmaceutical had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥132m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥307m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Jiangxi Fushine Pharmaceutical has 1 warning sign we think 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.

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.