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.' 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. Importantly, Zhangzhou Pientzehuang Pharmaceutical., Ltd (SHSE:600436) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Zhangzhou Pientzehuang Pharmaceutical

How Much Debt Does Zhangzhou Pientzehuang Pharmaceutical Carry?

As you can see below, at the end of September 2023, Zhangzhou Pientzehuang Pharmaceutical had CN¥843.4m of debt, up from CN¥802.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥2.63b in cash, so it actually has CN¥1.79b net cash.

A Look At Zhangzhou Pientzehuang Pharmaceutical's Liabilities

We can see from the most recent balance sheet that Zhangzhou Pientzehuang Pharmaceutical had liabilities of CN¥2.26b falling due within a year, and liabilities of CN¥273.7m due beyond that. On the other hand, it had cash of CN¥2.63b and CN¥903.5m worth of receivables due within a year. So it actually has CN¥1.00b more liquid assets than total liabilities.

This state of affairs indicates that Zhangzhou Pientzehuang Pharmaceutical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥139.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Zhangzhou Pientzehuang Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Zhangzhou Pientzehuang Pharmaceutical grew its EBIT at 18% 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 it is future earnings, more than anything, that will determine Zhangzhou Pientzehuang Pharmaceutical'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. While Zhangzhou Pientzehuang Pharmaceutical 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. Happily for any shareholders, Zhangzhou Pientzehuang Pharmaceutical actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhangzhou Pientzehuang Pharmaceutical has net cash of CN¥1.79b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.9b, being 105% of its EBIT. So we don't think Zhangzhou Pientzehuang Pharmaceutical's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Zhangzhou Pientzehuang Pharmaceutical, you may well want to click here to check an interactive graph of its earnings per share history.

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.