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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Luoxin Pharmaceuticals Group Stock Co., Ltd. (SZSE:002793) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Luoxin Pharmaceuticals Group Stock

How Much Debt Does Luoxin Pharmaceuticals Group Stock Carry?

As you can see below, Luoxin Pharmaceuticals Group Stock had CN¥2.29b of debt at June 2023, down from CN¥3.29b a year prior. However, because it has a cash reserve of CN¥1.22b, its net debt is less, at about CN¥1.07b.

A Look At Luoxin Pharmaceuticals Group Stock's Liabilities

The latest balance sheet data shows that Luoxin Pharmaceuticals Group Stock had liabilities of CN¥2.67b due within a year, and liabilities of CN¥709.2m falling due after that. On the other hand, it had cash of CN¥1.22b and CN¥1.16b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥995.9m.

Since publicly traded Luoxin Pharmaceuticals Group Stock shares are worth a total of CN¥5.87b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Luoxin Pharmaceuticals Group Stock will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Luoxin Pharmaceuticals Group Stock had a loss before interest and tax, and actually shrunk its revenue by 72%, to CN¥1.7b. To be frank that doesn't bode well.

Caveat Emptor

While Luoxin Pharmaceuticals Group Stock's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥1.7b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥77m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 1 warning sign for Luoxin Pharmaceuticals Group Stock you should know about.

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.