Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Hualan Biological Vaccine Inc. (SZSE:301207) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Hualan Biological Vaccine's Net Debt?

The chart below, which you can click on for greater detail, shows that Hualan Biological Vaccine had CN¥300.0m in debt in June 2024; about the same as the year before. But it also has CN¥2.83b in cash to offset that, meaning it has CN¥2.53b net cash.

How Healthy Is Hualan Biological Vaccine's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hualan Biological Vaccine had liabilities of CN¥1.30b due within 12 months and liabilities of CN¥42.9m due beyond that. On the other hand, it had cash of CN¥2.83b and CN¥1.18b worth of receivables due within a year. So it can boast CN¥2.66b more liquid assets than total liabilities.

It's good to see that Hualan Biological Vaccine has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Hualan Biological Vaccine boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Hualan Biological Vaccine grew its EBIT by 184% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hualan Biological Vaccine can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hualan Biological Vaccine has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Hualan Biological Vaccine recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hualan Biological Vaccine has net cash of CN¥2.53b, as well as more liquid assets than liabilities. And we liked the look of last year's 184% year-on-year EBIT growth. So is Hualan Biological Vaccine's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Hualan Biological Vaccine has 2 warning signs we think you should be aware of.

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.