Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Guizhou Sanli Pharmaceutical Co.,Ltd (SHSE:603439) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Guizhou Sanli PharmaceuticalLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Guizhou Sanli PharmaceuticalLtd had CN¥205.0m in debt in September 2023; about the same as the year before. But on the other hand it also has CN¥594.3m in cash, leading to a CN¥389.3m net cash position.

How Strong Is Guizhou Sanli PharmaceuticalLtd's Balance Sheet?

We can see from the most recent balance sheet that Guizhou Sanli PharmaceuticalLtd had liabilities of CN¥492.9m falling due within a year, and liabilities of CN¥59.0m due beyond that. Offsetting these obligations, it had cash of CN¥594.3m as well as receivables valued at CN¥381.2m due within 12 months. So it can boast CN¥423.5m more liquid assets than total liabilities.

This surplus suggests that Guizhou Sanli PharmaceuticalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guizhou Sanli PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Guizhou Sanli PharmaceuticalLtd has boosted its EBIT by 89%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Guizhou Sanli PharmaceuticalLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Guizhou Sanli PharmaceuticalLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Guizhou Sanli PharmaceuticalLtd recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guizhou Sanli PharmaceuticalLtd has net cash of CN¥389.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 89% over the last year. So is Guizhou Sanli PharmaceuticalLtd's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Guizhou Sanli PharmaceuticalLtd's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.