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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Changchun BCHT Biotechnology Co. (SHSE:688276) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Changchun BCHT Biotechnology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Changchun BCHT Biotechnology had debt of CN¥62.6m, up from none in one year. However, it does have CN¥277.9m in cash offsetting this, leading to net cash of CN¥215.3m.

A Look At Changchun BCHT Biotechnology's Liabilities

We can see from the most recent balance sheet that Changchun BCHT Biotechnology had liabilities of CN¥1.07b falling due within a year, and liabilities of CN¥47.1m due beyond that. On the other hand, it had cash of CN¥277.9m and CN¥1.67b worth of receivables due within a year. So it actually has CN¥836.6m more liquid assets than total liabilities.

This surplus suggests that Changchun BCHT Biotechnology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Changchun BCHT Biotechnology has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Changchun BCHT Biotechnology has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Changchun BCHT Biotechnology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Changchun BCHT Biotechnology 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 last three years, Changchun BCHT Biotechnology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Changchun BCHT Biotechnology has net cash of CN¥215.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 42% over the last year. So we don't have any problem with Changchun BCHT Biotechnology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Changchun BCHT Biotechnology , and understanding them should be part of your investment process.

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.