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. Importantly, HARBIN GLORIA PHARMACEUTICALS Co., LTD (SZSE:002437) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is HARBIN GLORIA PHARMACEUTICALS's Debt?

The image below, which you can click on for greater detail, shows that HARBIN GLORIA PHARMACEUTICALS had debt of CN¥115.1m at the end of June 2024, a reduction from CN¥1.00b over a year. However, it does have CN¥433.9m in cash offsetting this, leading to net cash of CN¥318.8m.

How Healthy Is HARBIN GLORIA PHARMACEUTICALS' Balance Sheet?

We can see from the most recent balance sheet that HARBIN GLORIA PHARMACEUTICALS had liabilities of CN¥837.7m falling due within a year, and liabilities of CN¥61.4m due beyond that. Offsetting these obligations, it had cash of CN¥433.9m as well as receivables valued at CN¥226.2m due within 12 months. So it has liabilities totalling CN¥239.0m more than its cash and near-term receivables, combined.

Since publicly traded HARBIN GLORIA PHARMACEUTICALS shares are worth a total of CN¥4.68b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, HARBIN GLORIA PHARMACEUTICALS also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that HARBIN GLORIA PHARMACEUTICALS has boosted its EBIT by 70%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HARBIN GLORIA PHARMACEUTICALS will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. HARBIN GLORIA PHARMACEUTICALS may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, HARBIN GLORIA PHARMACEUTICALS actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about HARBIN GLORIA PHARMACEUTICALS's liabilities, but we can be reassured by the fact it has has net cash of CN¥318.8m. And it impressed us with free cash flow of CN¥234m, being 223% of its EBIT. So we don't think HARBIN GLORIA PHARMACEUTICALS's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with HARBIN GLORIA PHARMACEUTICALS .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.