David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Jilin Zixin Pharmaceutical Industrial Co.,Ltd. (SZSE:002118) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jilin Zixin Pharmaceutical IndustrialLtd

What Is Jilin Zixin Pharmaceutical IndustrialLtd's Debt?

As you can see below, Jilin Zixin Pharmaceutical IndustrialLtd had CN¥6.18b of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. Net debt is about the same, since the it doesn't have much cash.

A Look At Jilin Zixin Pharmaceutical IndustrialLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Jilin Zixin Pharmaceutical IndustrialLtd had liabilities of CN¥6.92b due within 12 months and liabilities of CN¥1.46b due beyond that. On the other hand, it had cash of CN¥9.40m and CN¥718.4m worth of receivables due within a year. So it has liabilities totalling CN¥7.65b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥3.70b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Jilin Zixin Pharmaceutical IndustrialLtd would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jilin Zixin Pharmaceutical IndustrialLtd 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.

Over 12 months, Jilin Zixin Pharmaceutical IndustrialLtd made a loss at the EBIT level, and saw its revenue drop to CN¥145m, which is a fall of 42%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Jilin Zixin Pharmaceutical IndustrialLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥584m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CN¥211m over the last twelve months. So suffice it to say we 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. Case in point: We've spotted 3 warning signs for Jilin Zixin Pharmaceutical IndustrialLtd you should be aware of, and 2 of them are a bit unpleasant.

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.