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.' 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. Importantly, Lifecome Biochemistry Co.,Ltd. (SZSE:002868) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Lifecome BiochemistryLtd

What Is Lifecome BiochemistryLtd's Debt?

As you can see below, at the end of December 2022, Lifecome BiochemistryLtd had CN¥357.3m of debt, up from CN¥290.4m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥23.8m, its net debt is less, at about CN¥333.5m.

How Healthy Is Lifecome BiochemistryLtd's Balance Sheet?

According to the last reported balance sheet, Lifecome BiochemistryLtd had liabilities of CN¥485.1m due within 12 months, and liabilities of CN¥155.4m due beyond 12 months. On the other hand, it had cash of CN¥23.8m and CN¥60.8m worth of receivables due within a year. So its liabilities total CN¥556.0m more than the combination of its cash and short-term receivables.

Since publicly traded Lifecome BiochemistryLtd shares are worth a total of CN¥5.68b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Lifecome BiochemistryLtd 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 Lifecome BiochemistryLtd had a loss before interest and tax, and actually shrunk its revenue by 9.2%, to CN¥330m. We would much prefer see growth.

Caveat Emptor

Importantly, Lifecome BiochemistryLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥60m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥146m in negative free cash flow over the last twelve months. So to be blunt we think it 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 be aware of the 2 warning signs we've spotted with Lifecome BiochemistryLtd .

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.