The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Landfar Bio-medicine Co., Ltd (SZSE:000504) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Landfar Bio-medicine

What Is Landfar Bio-medicine's Debt?

You can click the graphic below for the historical numbers, but it shows that Landfar Bio-medicine had CN¥228.7m of debt in September 2022, down from CN¥312.4m, one year before. However, because it has a cash reserve of CN¥199.4m, its net debt is less, at about CN¥29.3m.

How Strong Is Landfar Bio-medicine's Balance Sheet?

The latest balance sheet data shows that Landfar Bio-medicine had liabilities of CN¥457.7m due within a year, and liabilities of CN¥19.9m falling due after that. Offsetting this, it had CN¥199.4m in cash and CN¥203.9m in receivables that were due within 12 months. So its liabilities total CN¥74.2m more than the combination of its cash and short-term receivables.

Having regard to Landfar Bio-medicine'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¥3.81b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Landfar Bio-medicine has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is Landfar Bio-medicine'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.

In the last year Landfar Bio-medicine wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to CN¥210m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Landfar Bio-medicine's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at CN¥12m. 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. We would feel better if it turned its trailing twelve month loss of CN¥10m into a profit. So to be blunt we do think it is risky. 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 Landfar Bio-medicine'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.