Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Heilongjiang ZBD Pharmaceutical Co., Ltd. (SHSE:603567) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Heilongjiang ZBD Pharmaceutical

What Is Heilongjiang ZBD Pharmaceutical's Debt?

As you can see below, Heilongjiang ZBD Pharmaceutical had CN¥3.05b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of CN¥854.2m, its net debt is less, at about CN¥2.19b.

How Healthy Is Heilongjiang ZBD Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Heilongjiang ZBD Pharmaceutical had liabilities of CN¥2.69b due within a year, and liabilities of CN¥1.44b falling due after that. On the other hand, it had cash of CN¥854.2m and CN¥4.28b worth of receivables due within a year. So it actually has CN¥1.01b more liquid assets than total liabilities.

This short term liquidity is a sign that Heilongjiang ZBD Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Heilongjiang ZBD Pharmaceutical 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 Heilongjiang ZBD Pharmaceutical had a loss before interest and tax, and actually shrunk its revenue by 8.7%, to CN¥4.3b. We would much prefer see growth.

Caveat Emptor

Importantly, Heilongjiang ZBD Pharmaceutical had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥161m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Heilongjiang ZBD Pharmaceutical (1 is potentially serious!) that you should be aware of before investing here.

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.