David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Guizhou Bailing Group Pharmaceutical Co., Ltd. (SZSE:002424) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Guizhou Bailing Group Pharmaceutical Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Guizhou Bailing Group Pharmaceutical had debt of CN¥1.75b, up from CN¥1.60b in one year. On the flip side, it has CN¥298.9m in cash leading to net debt of about CN¥1.45b.

A Look At Guizhou Bailing Group Pharmaceutical's Liabilities

We can see from the most recent balance sheet that Guizhou Bailing Group Pharmaceutical had liabilities of CN¥4.05b falling due within a year, and liabilities of CN¥255.2m due beyond that. On the other hand, it had cash of CN¥298.9m and CN¥2.83b worth of receivables due within a year. So it has liabilities totalling CN¥1.17b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Guizhou Bailing Group Pharmaceutical is worth CN¥4.77b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guizhou Bailing Group Pharmaceutical's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Guizhou Bailing Group Pharmaceutical reported revenue of CN¥4.5b, which is a gain of 16%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Guizhou Bailing Group Pharmaceutical had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥466m at the EBIT level. 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. However, it doesn't help that it burned through CN¥163m of cash over the last year. So suffice it to say we do consider the stock to be 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. For example, we've discovered 3 warning signs for Guizhou Bailing Group Pharmaceutical (2 make us uncomfortable!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com