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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Zhonghong Pulin Medical Products Co., Ltd. (SZSE:300981) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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.

What Is Zhonghong Pulin Medical Products's Net Debt?

As you can see below, at the end of March 2024, Zhonghong Pulin Medical Products had CN¥920.6m of debt, up from CN¥499.4m a year ago. Click the image for more detail. But it also has CN¥2.83b in cash to offset that, meaning it has CN¥1.91b net cash.

A Look At Zhonghong Pulin Medical Products' Liabilities

Zooming in on the latest balance sheet data, we can see that Zhonghong Pulin Medical Products had liabilities of CN¥1.50b due within 12 months and liabilities of CN¥151.7m due beyond that. Offsetting these obligations, it had cash of CN¥2.83b as well as receivables valued at CN¥462.9m due within 12 months. So it can boast CN¥1.64b more liquid assets than total liabilities.

This surplus liquidity suggests that Zhonghong Pulin Medical Products' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Zhonghong Pulin Medical Products boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhonghong Pulin Medical Products'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.

Over 12 months, Zhonghong Pulin Medical Products reported revenue of CN¥2.2b, which is a gain of 55%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Zhonghong Pulin Medical Products?

Although Zhonghong Pulin Medical Products had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥36m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 55% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for Zhonghong Pulin Medical Products you should know about.

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.