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 Shenyang Xingqi Pharmaceutical Co.,Ltd. (SZSE:300573) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shenyang Xingqi PharmaceuticalLtd's Debt?

As you can see below, at the end of March 2024, Shenyang Xingqi PharmaceuticalLtd had CN¥100.1m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥567.9m in cash, so it actually has CN¥467.8m net cash.

How Healthy Is Shenyang Xingqi PharmaceuticalLtd's Balance Sheet?

The latest balance sheet data shows that Shenyang Xingqi PharmaceuticalLtd had liabilities of CN¥312.9m due within a year, and liabilities of CN¥74.0m falling due after that. Offsetting this, it had CN¥567.9m in cash and CN¥223.8m in receivables that were due within 12 months. So it actually has CN¥404.9m more liquid assets than total liabilities.

This state of affairs indicates that Shenyang Xingqi PharmaceuticalLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥35.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Shenyang Xingqi PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Shenyang Xingqi PharmaceuticalLtd grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenyang Xingqi PharmaceuticalLtd 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 company can only pay off debt with cold hard cash, not accounting profits. Shenyang Xingqi PharmaceuticalLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Shenyang Xingqi PharmaceuticalLtd's free cash flow amounted to 39% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenyang Xingqi PharmaceuticalLtd has net cash of CN¥467.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 60% over the last year. So we don't think Shenyang Xingqi PharmaceuticalLtd's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shenyang Xingqi PharmaceuticalLtd 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.