The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Lifecome Biochemistry Co.,Ltd. (SZSE:002868) does carry debt. But the real question is whether this debt is making the company risky.

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. 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 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 Lifecome BiochemistryLtd

How Much Debt Does Lifecome BiochemistryLtd Carry?

As you can see below, at the end of September 2022, Lifecome BiochemistryLtd had CN¥285.2m of debt, up from CN¥271.5m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥34.7m, its net debt is less, at about CN¥250.5m.

How Healthy Is Lifecome BiochemistryLtd's Balance Sheet?

We can see from the most recent balance sheet that Lifecome BiochemistryLtd had liabilities of CN¥449.5m falling due within a year, and liabilities of CN¥163.6m due beyond that. Offsetting these obligations, it had cash of CN¥34.7m as well as receivables valued at CN¥63.9m due within 12 months. So it has liabilities totalling CN¥514.5m more than its cash and near-term receivables, combined.

Of course, Lifecome BiochemistryLtd has a market capitalization of CN¥8.40b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Lifecome BiochemistryLtd will need earnings to service that debt. 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.

Over 12 months, Lifecome BiochemistryLtd reported revenue of CN¥345m, which is a gain of 8.1%, although it did not report any earnings before interest and tax. 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 Lifecome BiochemistryLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥75m. 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¥215m of cash over the last year. So suffice it to say we do consider the stock to be 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. For example - Lifecome BiochemistryLtd has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.