Hebei Changshan Biochemical Pharmaceutical (SZSE:300255) Is Carrying A Fair Bit Of Debt

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. We note that Hebei Changshan Biochemical Pharmaceutical Co., Ltd. (SZSE:300255) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hebei Changshan Biochemical Pharmaceutical

What Is Hebei Changshan Biochemical Pharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that Hebei Changshan Biochemical Pharmaceutical had debt of CN¥2.28b at the end of June 2024, a reduction from CN¥2.64b over a year. However, because it has a cash reserve of CN¥338.8m, its net debt is less, at about CN¥1.94b.

A Look At Hebei Changshan Biochemical Pharmaceutical's Liabilities

The latest balance sheet data shows that Hebei Changshan Biochemical Pharmaceutical had liabilities of CN¥2.33b due within a year, and liabilities of CN¥688.9m falling due after that. Offsetting this, it had CN¥338.8m in cash and CN¥404.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.28b.

This deficit isn't so bad because Hebei Changshan Biochemical Pharmaceutical is worth CN¥10.3b, 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 you can't view debt in total isolation; since Hebei Changshan Biochemical 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.

In the last year Hebei Changshan Biochemical Pharmaceutical had a loss before interest and tax, and actually shrunk its revenue by 42%, to CN¥1.2b. That makes us nervous, to say the least.

Caveat Emptor

While Hebei Changshan Biochemical Pharmaceutical's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥1.0b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥1.1b. So to be blunt we do think it is 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 example - Hebei Changshan Biochemical Pharmaceutical has 2 warning signs we think you should be aware of.

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.