Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Lionco Pharmaceutical Group Co.,Ltd. (SHSE:603669) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Lionco Pharmaceutical GroupLtd's Net Debt?

As you can see below, Lionco Pharmaceutical GroupLtd had CN¥465.2m of debt at March 2024, down from CN¥675.7m a year prior. But it also has CN¥600.7m in cash to offset that, meaning it has CN¥135.6m net cash.

How Healthy Is Lionco Pharmaceutical GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Lionco Pharmaceutical GroupLtd had liabilities of CN¥111.2m falling due within a year, and liabilities of CN¥458.6m due beyond that. On the other hand, it had cash of CN¥600.7m and CN¥63.8m worth of receivables due within a year. So it can boast CN¥94.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Lionco Pharmaceutical GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Lionco Pharmaceutical GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lionco Pharmaceutical GroupLtd'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.

Over 12 months, Lionco Pharmaceutical GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥200m, which is a fall of 15%. That's not what we would hope to see.

So How Risky Is Lionco Pharmaceutical GroupLtd?

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 Lionco Pharmaceutical GroupLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥55m and booked a CN¥145m accounting loss. But the saving grace is the CN¥135.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the 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. Case in point: We've spotted 1 warning sign for Lionco Pharmaceutical GroupLtd you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.