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.' 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. We can see that Porton Pharma Solutions Ltd. (SZSE:300363) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Porton Pharma Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Porton Pharma Solutions had CN¥1.37b of debt, an increase on CN¥942.1m, over one year. However, it does have CN¥1.40b in cash offsetting this, leading to net cash of CN¥32.3m.

How Healthy Is Porton Pharma Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Porton Pharma Solutions had liabilities of CN¥1.51b due within 12 months and liabilities of CN¥1.86b due beyond that. On the other hand, it had cash of CN¥1.40b and CN¥822.7m worth of receivables due within a year. So it has liabilities totalling CN¥1.14b more than its cash and near-term receivables, combined.

Since publicly traded Porton Pharma Solutions shares are worth a total of CN¥9.82b, 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. Despite its noteworthy liabilities, Porton Pharma Solutions boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Porton Pharma Solutions's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Porton Pharma Solutions had a loss before interest and tax, and actually shrunk its revenue by 43%, to CN¥2.8b. To be frank that doesn't bode well.

So How Risky Is Porton Pharma Solutions?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Porton Pharma Solutions had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥705m and booked a CN¥391m accounting loss. With only CN¥32.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Be aware that Porton Pharma Solutions is showing 2 warning signs in our investment analysis , you should know about...

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.