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 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. We note that Shenzhen Hepalink Pharmaceutical Group Co., Ltd. (SZSE:002399) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Shenzhen Hepalink Pharmaceutical Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Hepalink Pharmaceutical Group had CN¥4.86b of debt in March 2024, down from CN¥6.22b, one year before. However, it also had CN¥2.50b in cash, and so its net debt is CN¥2.35b.

How Strong Is Shenzhen Hepalink Pharmaceutical Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Hepalink Pharmaceutical Group had liabilities of CN¥4.61b due within 12 months and liabilities of CN¥2.12b due beyond that. Offsetting these obligations, it had cash of CN¥2.50b as well as receivables valued at CN¥1.26b due within 12 months. So it has liabilities totalling CN¥2.98b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Shenzhen Hepalink Pharmaceutical Group is worth CN¥12.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Hepalink Pharmaceutical Group'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.

Over 12 months, Shenzhen Hepalink Pharmaceutical Group made a loss at the EBIT level, and saw its revenue drop to CN¥5.5b, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

Not only did Shenzhen Hepalink Pharmaceutical Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥134m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥695m. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Shenzhen Hepalink Pharmaceutical Group's profit, revenue, and operating cashflow have changed over the last few years.

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.

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