Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Pacific Shuanglin Bio-pharmacy Co., LTD (SZSE:000403) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Pacific Shuanglin Bio-pharmacy's Net Debt?

As you can see below, at the end of March 2024, Pacific Shuanglin Bio-pharmacy had CN¥528.2m of debt, up from CN¥370.7m a year ago. Click the image for more detail. But it also has CN¥1.76b in cash to offset that, meaning it has CN¥1.23b net cash.

How Healthy Is Pacific Shuanglin Bio-pharmacy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pacific Shuanglin Bio-pharmacy had liabilities of CN¥859.1m due within 12 months and liabilities of CN¥314.2m due beyond that. On the other hand, it had cash of CN¥1.76b and CN¥529.1m worth of receivables due within a year. So it can boast CN¥1.12b more liquid assets than total liabilities.

This surplus suggests that Pacific Shuanglin Bio-pharmacy has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Pacific Shuanglin Bio-pharmacy boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Pacific Shuanglin Bio-pharmacy grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pacific Shuanglin Bio-pharmacy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Pacific Shuanglin Bio-pharmacy 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. In the last three years, Pacific Shuanglin Bio-pharmacy's free cash flow amounted to 23% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Pacific Shuanglin Bio-pharmacy has net cash of CN¥1.23b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 35% over the last year. So is Pacific Shuanglin Bio-pharmacy's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Pacific Shuanglin Bio-pharmacy has 1 warning sign we think you should be aware of.

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.

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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.