Does Guizhou Bailing Group Pharmaceutical (SZSE:002424) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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, Guizhou Bailing Group Pharmaceutical Co., Ltd. (SZSE:002424) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Guizhou Bailing Group Pharmaceutical

What Is Guizhou Bailing Group Pharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Guizhou Bailing Group Pharmaceutical had debt of CN¥1.81b, up from CN¥1.71b in one year. However, it does have CN¥322.9m in cash offsetting this, leading to net debt of about CN¥1.49b.

How Strong Is Guizhou Bailing Group Pharmaceutical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guizhou Bailing Group Pharmaceutical had liabilities of CN¥3.74b due within 12 months and liabilities of CN¥260.7m due beyond that. Offsetting this, it had CN¥322.9m in cash and CN¥2.56b in receivables that were due within 12 months. So its liabilities total CN¥1.11b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Guizhou Bailing Group Pharmaceutical is worth CN¥5.02b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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

Over the last twelve months Guizhou Bailing Group Pharmaceutical produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥419m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥26m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Guizhou Bailing Group Pharmaceutical .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.