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.' 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 note that Haisco Pharmaceutical Group Co., Ltd. (SZSE:002653) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Haisco Pharmaceutical Group

How Much Debt Does Haisco Pharmaceutical Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Haisco Pharmaceutical Group had CN¥1.57b of debt, an increase on CN¥1.09b, over one year. On the flip side, it has CN¥703.1m in cash leading to net debt of about CN¥867.0m.

How Healthy Is Haisco Pharmaceutical Group's Balance Sheet?

According to the last reported balance sheet, Haisco Pharmaceutical Group had liabilities of CN¥1.39b due within 12 months, and liabilities of CN¥863.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥703.1m as well as receivables valued at CN¥620.3m due within 12 months. So its liabilities total CN¥929.0m more than the combination of its cash and short-term receivables.

Of course, Haisco Pharmaceutical Group has a market capitalization of CN¥17.1b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Haisco Pharmaceutical Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Haisco Pharmaceutical Group made a loss at the EBIT level, and saw its revenue drop to CN¥2.6b, which is a fall of 25%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Haisco Pharmaceutical Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥3.0m. 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¥715m 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 Haisco Pharmaceutical Group has 3 warning signs (and 2 which can't be ignored) we think you should know about.

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.