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, Zhejiang Garden Biopharmaceutical Co.,Ltd. (SZSE:300401) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zhejiang Garden BiopharmaceuticalLtd

What Is Zhejiang Garden BiopharmaceuticalLtd's Net Debt?

As you can see below, at the end of September 2023, Zhejiang Garden BiopharmaceuticalLtd had CN¥1.72b of debt, up from CN¥661.8m a year ago. Click the image for more detail. However, it does have CN¥1.77b in cash offsetting this, leading to net cash of CN¥48.7m.

How Strong Is Zhejiang Garden BiopharmaceuticalLtd's Balance Sheet?

The latest balance sheet data shows that Zhejiang Garden BiopharmaceuticalLtd had liabilities of CN¥1.46b due within a year, and liabilities of CN¥1.06b falling due after that. On the other hand, it had cash of CN¥1.77b and CN¥156.1m worth of receivables due within a year. So its liabilities total CN¥596.4m more than the combination of its cash and short-term receivables.

Given Zhejiang Garden BiopharmaceuticalLtd has a market capitalization of CN¥5.08b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Zhejiang Garden BiopharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Zhejiang Garden BiopharmaceuticalLtd's load is not too heavy, because its EBIT was down 62% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhejiang Garden BiopharmaceuticalLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Zhejiang Garden BiopharmaceuticalLtd 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. During the last three years, Zhejiang Garden BiopharmaceuticalLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Zhejiang Garden BiopharmaceuticalLtd does have more liabilities than liquid assets, it also has net cash of CN¥48.7m. So while Zhejiang Garden BiopharmaceuticalLtd does not have a great balance sheet, it's certainly not too bad. 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. Case in point: We've spotted 3 warning signs for Zhejiang Garden BiopharmaceuticalLtd you should be aware of.

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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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.