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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, China Resources Boya Bio-pharmaceutical Group Co.,Ltd (SZSE:300294) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does China Resources Boya Bio-pharmaceutical GroupLtd Carry?

As you can see below, at the end of March 2024, China Resources Boya Bio-pharmaceutical GroupLtd had CN¥23.0m of debt, up from CN¥2.82m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥5.57b in cash, so it actually has CN¥5.55b net cash.

How Healthy Is China Resources Boya Bio-pharmaceutical GroupLtd's Balance Sheet?

According to the last reported balance sheet, China Resources Boya Bio-pharmaceutical GroupLtd had liabilities of CN¥469.7m due within 12 months, and liabilities of CN¥50.6m due beyond 12 months. On the other hand, it had cash of CN¥5.57b and CN¥472.6m worth of receivables due within a year. So it can boast CN¥5.52b more liquid assets than total liabilities.

This excess liquidity is a great indication that China Resources Boya Bio-pharmaceutical GroupLtd's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that China Resources Boya Bio-pharmaceutical GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, China Resources Boya Bio-pharmaceutical GroupLtd saw its EBIT drop by 5.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine China Resources Boya Bio-pharmaceutical GroupLtd'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. China Resources Boya Bio-pharmaceutical GroupLtd 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. Happily for any shareholders, China Resources Boya Bio-pharmaceutical GroupLtd actually produced more free cash flow than EBIT over the last three years. 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 it is always sensible to investigate a company's debt, in this case China Resources Boya Bio-pharmaceutical GroupLtd has CN¥5.55b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥458m, being 152% of its EBIT. So we don't think China Resources Boya Bio-pharmaceutical GroupLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for China Resources Boya Bio-pharmaceutical GroupLtd you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com