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.' 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. As with many other companies Zhejiang Garden Biopharmaceutical Co.,Ltd. (SZSE:300401) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 Zhejiang Garden BiopharmaceuticalLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang Garden BiopharmaceuticalLtd had debt of CN¥1.57b, up from CN¥1.50b in one year. However, it does have CN¥1.72b in cash offsetting this, leading to net cash of CN¥150.2m.

A Look At Zhejiang Garden BiopharmaceuticalLtd's Liabilities

The latest balance sheet data shows that Zhejiang Garden BiopharmaceuticalLtd had liabilities of CN¥1.41b due within a year, and liabilities of CN¥1.11b falling due after that. On the other hand, it had cash of CN¥1.72b and CN¥133.4m worth of receivables due within a year. So it has liabilities totalling CN¥657.4m more than its cash and near-term receivables, combined.

Since publicly traded Zhejiang Garden BiopharmaceuticalLtd shares are worth a total of CN¥8.08b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 39% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zhejiang Garden BiopharmaceuticalLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhejiang Garden BiopharmaceuticalLtd 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. During the last three years, Zhejiang Garden BiopharmaceuticalLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Zhejiang Garden BiopharmaceuticalLtd has CN¥150.2m in net cash. So while Zhejiang Garden BiopharmaceuticalLtd does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Zhejiang Garden BiopharmaceuticalLtd .

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.

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