Warren Buffett famously said, '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. Importantly, China Resources Double-Crane Pharmaceutical Co.,Ltd. (SHSE:600062) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is China Resources Double-Crane PharmaceuticalLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 China Resources Double-Crane PharmaceuticalLtd had CN¥686.4m of debt, an increase on CN¥14.8m, over one year. However, it does have CN¥2.71b in cash offsetting this, leading to net cash of CN¥2.02b.

A Look At China Resources Double-Crane PharmaceuticalLtd's Liabilities

According to the last reported balance sheet, China Resources Double-Crane PharmaceuticalLtd had liabilities of CN¥4.57b due within 12 months, and liabilities of CN¥1.09b due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.71b as well as receivables valued at CN¥2.73b due within 12 months. So it has liabilities totalling CN¥225.7m more than its cash and near-term receivables, combined.

Having regard to China Resources Double-Crane PharmaceuticalLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥21.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, China Resources Double-Crane PharmaceuticalLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, China Resources Double-Crane PharmaceuticalLtd's EBIT dived 10%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China Resources Double-Crane PharmaceuticalLtd can strengthen its balance sheet over time. 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 China Resources Double-Crane PharmaceuticalLtd 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. Over the most recent three years, China Resources Double-Crane PharmaceuticalLtd recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that China Resources Double-Crane PharmaceuticalLtd has CN¥2.02b in net cash. And it impressed us with free cash flow of CN¥1.1b, being 72% of its EBIT. So we are not troubled with China Resources Double-Crane PharmaceuticalLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with China Resources Double-Crane PharmaceuticalLtd , 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.