Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Youcare Pharmaceutical Group Co., Ltd. (SHSE:688658) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Youcare Pharmaceutical Group's Debt?

As you can see below, at the end of March 2024, Youcare Pharmaceutical Group had CN¥698.6m of debt, up from CN¥228.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.73b in cash, so it actually has CN¥1.03b net cash.

A Look At Youcare Pharmaceutical Group's Liabilities

We can see from the most recent balance sheet that Youcare Pharmaceutical Group had liabilities of CN¥2.04b falling due within a year, and liabilities of CN¥428.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.73b as well as receivables valued at CN¥1.06b due within 12 months. So it can boast CN¥324.4m more liquid assets than total liabilities.

This surplus suggests that Youcare Pharmaceutical Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Youcare Pharmaceutical Group has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Youcare Pharmaceutical Group if management cannot prevent a repeat of the 28% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Youcare Pharmaceutical Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Youcare Pharmaceutical Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Youcare Pharmaceutical Group burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Youcare Pharmaceutical Group has net cash of CN¥1.03b, as well as more liquid assets than liabilities. So while Youcare Pharmaceutical Group does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should learn about the 3 warning signs we've spotted with Youcare Pharmaceutical Group (including 2 which don't sit too well with us) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.