Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Zhejiang Hisoar Pharmaceutical Co., Ltd. (SZSE:002099) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Zhejiang Hisoar Pharmaceutical's Debt?

The image below, which you can click on for greater detail, shows that Zhejiang Hisoar Pharmaceutical had debt of CN¥1.23b at the end of June 2024, a reduction from CN¥1.43b over a year. However, its balance sheet shows it holds CN¥1.55b in cash, so it actually has CN¥325.9m net cash.

How Healthy Is Zhejiang Hisoar Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Zhejiang Hisoar Pharmaceutical had liabilities of CN¥2.00b due within 12 months, and liabilities of CN¥149.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.55b as well as receivables valued at CN¥502.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥89.7m.

This state of affairs indicates that Zhejiang Hisoar Pharmaceutical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥9.00b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Zhejiang Hisoar Pharmaceutical 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 you can't view debt in total isolation; since Zhejiang Hisoar Pharmaceutical will need earnings to service that debt. 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.

In the last year Zhejiang Hisoar Pharmaceutical had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥2.0b. That's not what we would hope to see.

So How Risky Is Zhejiang Hisoar Pharmaceutical?

While Zhejiang Hisoar Pharmaceutical lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥185m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For example - Zhejiang Hisoar Pharmaceutical has 1 warning sign we think you should be aware of.

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.