Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Getein Biotech, Inc (SHSE:603387) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Getein Biotech

What Is Getein Biotech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Getein Biotech had CN¥568.2m of debt, an increase on CN¥397.3m, over one year. But on the other hand it also has CN¥1.59b in cash, leading to a CN¥1.02b net cash position.

A Look At Getein Biotech's Liabilities

According to the last reported balance sheet, Getein Biotech had liabilities of CN¥1.02b due within 12 months, and liabilities of CN¥45.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.59b as well as receivables valued at CN¥644.8m due within 12 months. So it actually has CN¥1.17b more liquid assets than total liabilities.

This excess liquidity suggests that Getein Biotech is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Getein Biotech boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Getein Biotech has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Getein Biotech'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Getein Biotech 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. In the last three years, Getein Biotech's free cash flow amounted to 40% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Getein Biotech has net cash of CN¥1.02b, as well as more liquid assets than liabilities. And we liked the look of last year's 72% year-on-year EBIT growth. So we don't think Getein Biotech's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Getein Biotech (including 1 which is potentially serious) .

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.