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.' 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 Guizhou Bailing Group Pharmaceutical Co., Ltd. (SZSE:002424) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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 Guizhou Bailing Group Pharmaceutical's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Guizhou Bailing Group Pharmaceutical had CN¥1.81b of debt, an increase on CN¥1.71b, over one year. However, because it has a cash reserve of CN¥322.9m, its net debt is less, at about CN¥1.49b.

A Look At Guizhou Bailing Group Pharmaceutical's Liabilities

The latest balance sheet data shows that Guizhou Bailing Group Pharmaceutical had liabilities of CN¥3.74b due within a year, and liabilities of CN¥260.7m falling due after that. Offsetting these obligations, it had cash of CN¥322.9m as well as receivables valued at CN¥2.56b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.11b.

Guizhou Bailing Group Pharmaceutical has a market capitalization of CN¥5.09b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Guizhou Bailing Group Pharmaceutical's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Guizhou Bailing Group Pharmaceutical wasn't profitable at an EBIT level, but managed to grow its revenue by 8.4%, to CN¥4.5b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Guizhou Bailing Group Pharmaceutical had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥419m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥26m in negative free cash flow over the last twelve months. So to be blunt we think it 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. For example - Guizhou Bailing Group Pharmaceutical has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.