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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Shenzhen Hepalink Pharmaceutical Group Co., Ltd. (SZSE:002399) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Shenzhen Hepalink Pharmaceutical Group's Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Hepalink Pharmaceutical Group had debt of CN¥4.25b at the end of September 2024, a reduction from CN¥5.82b over a year. However, it also had CN¥3.08b in cash, and so its net debt is CN¥1.17b.

A Look At Shenzhen Hepalink Pharmaceutical Group's Liabilities

We can see from the most recent balance sheet that Shenzhen Hepalink Pharmaceutical Group had liabilities of CN¥4.34b falling due within a year, and liabilities of CN¥1.57b due beyond that. Offsetting this, it had CN¥3.08b in cash and CN¥1.30b in receivables that were due within 12 months. So its liabilities total CN¥1.53b more than the combination of its cash and short-term receivables.

Given Shenzhen Hepalink Pharmaceutical Group has a market capitalization of CN¥14.3b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shenzhen Hepalink Pharmaceutical Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Shenzhen Hepalink Pharmaceutical Group had a loss before interest and tax, and actually shrunk its revenue by 6.5%, to CN¥5.5b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Shenzhen Hepalink Pharmaceutical Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥87m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥146m into a profit. In the meantime, we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Shenzhen Hepalink Pharmaceutical Group's profit, revenue, and operating cashflow have changed over the last few years.

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.