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.' 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.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Lionco Pharmaceutical GroupLtd Carry?

The image below, which you can click on for greater detail, shows that Lionco Pharmaceutical GroupLtd had debt of CN¥259.0m at the end of September 2024, a reduction from CN¥653.8m over a year. However, it does have CN¥332.5m in cash offsetting this, leading to net cash of CN¥73.5m.

How Strong Is Lionco Pharmaceutical GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lionco Pharmaceutical GroupLtd had liabilities of CN¥87.7m due within 12 months and liabilities of CN¥262.2m due beyond that. On the other hand, it had cash of CN¥332.5m and CN¥71.0m worth of receivables due within a year. So it actually has CN¥53.6m more liquid assets than total liabilities.

Having regard to Lionco Pharmaceutical GroupLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.65b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Lionco Pharmaceutical GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Lionco Pharmaceutical GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Lionco Pharmaceutical GroupLtd reported revenue of CN¥277m, which is a gain of 47%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Lionco Pharmaceutical GroupLtd?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Lionco Pharmaceutical GroupLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥92m and booked a CN¥102m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥73.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Lionco Pharmaceutical GroupLtd may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Lionco Pharmaceutical GroupLtd .

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.

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.