Is Guizhou Bailing Group Pharmaceutical (SZSE:002424) Using Too Much Debt?

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. 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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Guizhou Bailing Group Pharmaceutical

What Is Guizhou Bailing Group Pharmaceutical's Net Debt?

The chart below, which you can click on for greater detail, shows that Guizhou Bailing Group Pharmaceutical had CN¥1.80b in debt in September 2024; about the same as the year before. However, because it has a cash reserve of CN¥170.6m, its net debt is less, at about CN¥1.63b.

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How Healthy 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¥3.39b due within 12 months and liabilities of CN¥266.7m due beyond that. Offsetting this, it had CN¥170.6m in cash and CN¥2.30b in receivables that were due within 12 months. So its liabilities total CN¥1.18b 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¥5.65b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Guizhou Bailing Group Pharmaceutical will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Guizhou Bailing Group Pharmaceutical saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Guizhou Bailing Group Pharmaceutical had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥459m 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. We would feel better if it turned its trailing twelve month loss of CN¥467m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Guizhou Bailing Group Pharmaceutical that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.