Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Zhangzhou Pientzehuang Pharmaceutical., Ltd (SHSE:600436) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Zhangzhou Pientzehuang Pharmaceutical Carry?

As you can see below, at the end of March 2024, Zhangzhou Pientzehuang Pharmaceutical had CN¥1.16b of debt, up from CN¥904.0m a year ago. Click the image for more detail. But it also has CN¥2.37b in cash to offset that, meaning it has CN¥1.22b net cash.

How Healthy Is Zhangzhou Pientzehuang Pharmaceutical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhangzhou Pientzehuang Pharmaceutical had liabilities of CN¥3.10b due within 12 months and liabilities of CN¥290.1m due beyond that. On the other hand, it had cash of CN¥2.37b and CN¥1.14b worth of receivables due within a year. So it can boast CN¥124.4m 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 it's very unlikely that the CN¥143.5b company is short on cash, but still worth keeping an eye on the 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 17% over the last year, further increasing its ability to manage debt. 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 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Zhangzhou Pientzehuang Pharmaceutical generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhangzhou Pientzehuang Pharmaceutical has CN¥1.22b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in CN¥2.0b. So is Zhangzhou Pientzehuang Pharmaceutical's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Zhangzhou Pientzehuang Pharmaceutical's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.