Is Hebei Changshan Biochemical Pharmaceutical (SZSE:300255) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Hebei Changshan Biochemical Pharmaceutical Co., Ltd. (SZSE:300255) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt 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¥1.64b at the end of September 2024, a reduction from CN¥2.46b over a year. On the flip side, it has CN¥314.2m in cash leading to net debt of about CN¥1.33b.

How Healthy Is Hebei Changshan Biochemical Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Hebei Changshan Biochemical Pharmaceutical had liabilities of CN¥1.97b due within 12 months, and liabilities of CN¥939.9m due beyond 12 months. Offsetting this, it had CN¥314.2m in cash and CN¥299.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.30b.

Of course, Hebei Changshan Biochemical Pharmaceutical has a market capitalization of CN¥17.8b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hebei Changshan Biochemical Pharmaceutical's earnings that will influence how the balance sheet holds up in the future. 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 37%, to CN¥1.1b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hebei Changshan Biochemical Pharmaceutical's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥942m 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. For example, we would not want to see a repeat of last year's loss of CN¥845m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Hebei Changshan Biochemical 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.