Warren Buffett famously said, '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 Harbin Pharmaceutical Group Co., Ltd. (SHSE:600664) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Harbin Pharmaceutical Group's Debt?

The chart below, which you can click on for greater detail, shows that Harbin Pharmaceutical Group had CN¥1.98b in debt in June 2024; about the same as the year before. But it also has CN¥3.18b in cash to offset that, meaning it has CN¥1.19b net cash.

How Healthy Is Harbin Pharmaceutical Group's Balance Sheet?

The latest balance sheet data shows that Harbin Pharmaceutical Group had liabilities of CN¥8.03b due within a year, and liabilities of CN¥447.7m falling due after that. Offsetting this, it had CN¥3.18b in cash and CN¥5.17b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Harbin Pharmaceutical Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥10.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Harbin Pharmaceutical Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Harbin Pharmaceutical Group grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Harbin Pharmaceutical Group'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Harbin Pharmaceutical Group 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, Harbin Pharmaceutical Group recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Harbin Pharmaceutical Group has CN¥1.19b in net cash. And it impressed us with its EBIT growth of 25% over the last year. So we don't think Harbin Pharmaceutical Group's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Harbin Pharmaceutical Group, you may well want to click here to check an interactive graph of its earnings per share history.

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.