Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Zhejiang CONBA Pharmaceutical Co.,Ltd. (SHSE:600572) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Zhejiang CONBA PharmaceuticalLtd
What Is Zhejiang CONBA PharmaceuticalLtd's Net Debt?
As you can see below, Zhejiang CONBA PharmaceuticalLtd had CN¥1.00b of debt at September 2023, down from CN¥1.22b a year prior. But it also has CN¥2.24b in cash to offset that, meaning it has CN¥1.24b net cash.
A Look At Zhejiang CONBA PharmaceuticalLtd's Liabilities
The latest balance sheet data shows that Zhejiang CONBA PharmaceuticalLtd had liabilities of CN¥2.91b due within a year, and liabilities of CN¥731.4m falling due after that. Offsetting these obligations, it had cash of CN¥2.24b as well as receivables valued at CN¥1.98b due within 12 months. So it actually has CN¥577.9m more liquid assets than total liabilities.
This surplus suggests that Zhejiang CONBA PharmaceuticalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang CONBA PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Zhejiang CONBA PharmaceuticalLtd grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zhejiang CONBA PharmaceuticalLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Zhejiang CONBA PharmaceuticalLtd 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 last three years, Zhejiang CONBA PharmaceuticalLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang CONBA PharmaceuticalLtd has net cash of CN¥1.24b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.0b, being 107% of its EBIT. So is Zhejiang CONBA PharmaceuticalLtd'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. However, not all investment risk resides within the balance sheet - far from it. For example - Zhejiang CONBA PharmaceuticalLtd has 2 warning signs we think you should be aware of.
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.