Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Realcan Pharmaceutical Group Co., Ltd. (SZSE:002589) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Realcan Pharmaceutical Group Carry?

The image below, which you can click on for greater detail, shows that Realcan Pharmaceutical Group had debt of CN¥5.08b at the end of March 2024, a reduction from CN¥5.58b over a year. However, it does have CN¥4.02b in cash offsetting this, leading to net debt of about CN¥1.06b.

How Healthy Is Realcan Pharmaceutical Group's Balance Sheet?

The latest balance sheet data shows that Realcan Pharmaceutical Group had liabilities of CN¥9.58b due within a year, and liabilities of CN¥321.5m falling due after that. Offsetting these obligations, it had cash of CN¥4.02b as well as receivables valued at CN¥5.27b due within 12 months. So it has liabilities totalling CN¥607.2m more than its cash and near-term receivables, combined.

Of course, Realcan Pharmaceutical Group has a market capitalization of CN¥4.40b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Realcan Pharmaceutical Group 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 Realcan Pharmaceutical Group had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥8.0b. To be frank that doesn't bode well.

Caveat Emptor

While Realcan Pharmaceutical Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥126m. 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¥350m of cash over the last year. So in short it's a really risky stock. 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, we've discovered 2 warning signs for Realcan Pharmaceutical Group (1 is potentially serious!) that you should be aware of before investing here.

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.