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 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, Fujian Cosunter Pharmaceutical Co., Ltd. (SZSE:300436) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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, 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.

What Is Fujian Cosunter Pharmaceutical's Net Debt?

The chart below, which you can click on for greater detail, shows that Fujian Cosunter Pharmaceutical had CN¥444.2m in debt in September 2024; about the same as the year before. On the flip side, it has CN¥127.3m in cash leading to net debt of about CN¥316.9m.

How Healthy Is Fujian Cosunter Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Fujian Cosunter Pharmaceutical had liabilities of CN¥545.8m due within a year, and liabilities of CN¥472.9m falling due after that. Offsetting these obligations, it had cash of CN¥127.3m as well as receivables valued at CN¥64.7m due within 12 months. So its liabilities total CN¥826.6m more than the combination of its cash and short-term receivables.

Of course, Fujian Cosunter Pharmaceutical has a market capitalization of CN¥5.04b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Fujian Cosunter Pharmaceutical will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Fujian Cosunter Pharmaceutical reported revenue of CN¥469m, which is a gain of 28%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Fujian Cosunter Pharmaceutical still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥123m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥70m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Fujian Cosunter Pharmaceutical , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.