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.' 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. We can see that Realcan Pharmaceutical Group Co., Ltd. (SZSE:002589) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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 Realcan Pharmaceutical Group

What Is Realcan Pharmaceutical Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Realcan Pharmaceutical Group had CN¥4.45b of debt in June 2023, down from CN¥5.97b, one year before. But it also has CN¥6.30b in cash to offset that, meaning it has CN¥1.85b net cash.

A Look At Realcan Pharmaceutical Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Realcan Pharmaceutical Group had liabilities of CN¥12.3b due within 12 months and liabilities of CN¥157.4m due beyond that. Offsetting this, it had CN¥6.30b in cash and CN¥5.79b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥398.3m.

Of course, Realcan Pharmaceutical Group has a market capitalization of CN¥4.95b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Realcan Pharmaceutical Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Realcan Pharmaceutical Group made a loss at the EBIT level, and saw its revenue drop to CN¥8.8b, which is a fall of 44%. To be frank that doesn't bode well.

So How Risky Is Realcan Pharmaceutical Group?

While Realcan Pharmaceutical Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥449m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Realcan Pharmaceutical Group that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.