Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Guangdong Marubi Biotechnology Co., Ltd. (SHSE:603983) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Guangdong Marubi Biotechnology Carry?

You can click the graphic below for the historical numbers, but it shows that Guangdong Marubi Biotechnology had CN¥248.3m of debt in June 2024, down from CN¥349.2m, one year before. But on the other hand it also has CN¥1.86b in cash, leading to a CN¥1.61b net cash position.

How Healthy Is Guangdong Marubi Biotechnology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangdong Marubi Biotechnology had liabilities of CN¥906.1m due within 12 months and liabilities of CN¥25.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.86b as well as receivables valued at CN¥91.9m due within 12 months. So it actually has CN¥1.02b more liquid assets than total liabilities.

This surplus suggests that Guangdong Marubi Biotechnology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Guangdong Marubi Biotechnology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Guangdong Marubi Biotechnology grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangdong Marubi Biotechnology'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 Guangdong Marubi Biotechnology 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 last three years, Guangdong Marubi Biotechnology saw substantial negative free cash flow, in total. 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 investigate a company's debt, in this case Guangdong Marubi Biotechnology has CN¥1.61b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 39% over the last year. So we don't have any problem with Guangdong Marubi Biotechnology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Guangdong Marubi Biotechnology you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.