Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Porton Pharma Solutions Ltd. (SZSE:300363) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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.

What Is Porton Pharma Solutions's Net Debt?

As you can see below, at the end of June 2024, Porton Pharma Solutions had CN¥1.35b of debt, up from CN¥913.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.48b in cash, so it actually has CN¥133.1m net cash.

How Strong Is Porton Pharma Solutions' Balance Sheet?

According to the last reported balance sheet, Porton Pharma Solutions had liabilities of CN¥1.42b due within 12 months, and liabilities of CN¥1.87b due beyond 12 months. Offsetting this, it had CN¥1.48b in cash and CN¥702.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.10b more than its cash and near-term receivables, combined.

Since publicly traded Porton Pharma Solutions shares are worth a total of CN¥6.14b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Porton Pharma Solutions also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Porton Pharma Solutions 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.

Over 12 months, Porton Pharma Solutions made a loss at the EBIT level, and saw its revenue drop to CN¥2.7b, which is a fall of 51%. That makes us nervous, to say the least.

So How Risky Is Porton Pharma Solutions?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Porton Pharma Solutions had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥879m of cash and made a loss of CN¥314m. Given it only has net cash of CN¥133.1m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Porton Pharma Solutions that you should be aware of before investing here.

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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