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. We note that Joincare Pharmaceutical Group Industry Co.,Ltd. (SHSE:600380) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

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 March 2022, Joincare Pharmaceutical Group IndustryLtd had CN¥3.57b of debt, up from CN¥2.13b a year ago. Click the image for more detail. But it also has CN¥12.7b in cash to offset that, meaning it has CN¥9.14b net cash.

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

The latest balance sheet data shows that Joincare Pharmaceutical Group IndustryLtd had liabilities of CN¥8.85b due within a year, and liabilities of CN¥2.59b falling due after that. On the other hand, it had cash of CN¥12.7b and CN¥5.20b worth of receivables due within a year. So it actually has CN¥6.47b more liquid assets than total liabilities.

This excess liquidity suggests that Joincare Pharmaceutical Group IndustryLtd is taking a careful approach to debt. 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!

Fortunately, Joincare Pharmaceutical Group IndustryLtd grew its EBIT by 4.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. 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 company can only pay off debt with cold hard cash, not accounting profits. While Joincare Pharmaceutical Group IndustryLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Joincare Pharmaceutical Group IndustryLtd produced sturdy free cash flow equating to 70% 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 Joincare Pharmaceutical Group IndustryLtd has CN¥9.14b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.5b, being 70% of its EBIT. So is Joincare Pharmaceutical Group IndustryLtd's debt a risk? It doesn't seem so to us. 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, we've discovered 1 warning sign for Joincare Pharmaceutical Group IndustryLtd that you should be aware of before investing here.

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.

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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.