David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Shandong Bailong Chuangyuan Bio-Tech Co., Ltd. (SHSE:605016) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

How Much Debt Does Shandong Bailong Chuangyuan Bio-Tech Carry?

As you can see below, at the end of June 2024, Shandong Bailong Chuangyuan Bio-Tech had CN¥70.0m of debt, up from CN¥50.0m a year ago. Click the image for more detail. However, it does have CN¥457.3m in cash offsetting this, leading to net cash of CN¥387.3m.

A Look At Shandong Bailong Chuangyuan Bio-Tech's Liabilities

According to the last reported balance sheet, Shandong Bailong Chuangyuan Bio-Tech had liabilities of CN¥330.0m due within 12 months, and liabilities of CN¥5.41m due beyond 12 months. Offsetting this, it had CN¥457.3m in cash and CN¥252.6m in receivables that were due within 12 months. So it can boast CN¥374.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Shandong Bailong Chuangyuan Bio-Tech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shandong Bailong Chuangyuan Bio-Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shandong Bailong Chuangyuan Bio-Tech has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shandong Bailong Chuangyuan Bio-Tech's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shandong Bailong Chuangyuan Bio-Tech 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. Considering the last three years, Shandong Bailong Chuangyuan Bio-Tech actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shandong Bailong Chuangyuan Bio-Tech has CN¥387.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 33% year-on-year EBIT growth. So we are not troubled with Shandong Bailong Chuangyuan Bio-Tech's debt use. 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. For instance, we've identified 1 warning sign for Shandong Bailong Chuangyuan Bio-Tech that you should be aware of.

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.