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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Guangdong Hybribio Biotech Co.,Ltd. (SZSE:300639) makes use of debt. But should shareholders be worried about its use of debt?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Guangdong Hybribio BiotechLtd Carry?

The image below, which you can click on for greater detail, shows that Guangdong Hybribio BiotechLtd had debt of CN¥28.8m at the end of March 2024, a reduction from CN¥100.2m over a year. But it also has CN¥920.3m in cash to offset that, meaning it has CN¥891.5m net cash.

A Look At Guangdong Hybribio BiotechLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Guangdong Hybribio BiotechLtd had liabilities of CN¥367.1m due within 12 months and liabilities of CN¥117.2m due beyond that. On the other hand, it had cash of CN¥920.3m and CN¥1.85b worth of receivables due within a year. So it can boast CN¥2.29b more liquid assets than total liabilities.

This surplus strongly suggests that Guangdong Hybribio BiotechLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Guangdong Hybribio BiotechLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guangdong Hybribio BiotechLtd'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, Guangdong Hybribio BiotechLtd made a loss at the EBIT level, and saw its revenue drop to CN¥985m, which is a fall of 78%. To be frank that doesn't bode well.

So How Risky Is Guangdong Hybribio BiotechLtd?

Although Guangdong Hybribio BiotechLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥61m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. There's no doubt the next few years will be crucial to how the business matures. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Guangdong Hybribio BiotechLtd 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.