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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Changchun BCHT Biotechnology Co. (SHSE:688276) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

What Is Changchun BCHT Biotechnology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Changchun BCHT Biotechnology had CN¥65.4m of debt, an increase on none, over one year. But it also has CN¥392.5m in cash to offset that, meaning it has CN¥327.1m net cash.

How Healthy Is Changchun BCHT Biotechnology's Balance Sheet?

According to the last reported balance sheet, Changchun BCHT Biotechnology had liabilities of CN¥1.00b due within 12 months, and liabilities of CN¥10.7m due beyond 12 months. Offsetting this, it had CN¥392.5m in cash and CN¥1.59b in receivables that were due within 12 months. So it can boast CN¥974.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Changchun BCHT Biotechnology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Changchun BCHT Biotechnology has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Changchun BCHT Biotechnology grew its EBIT by 265% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Changchun BCHT Biotechnology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Changchun BCHT Biotechnology 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. During the last three years, Changchun BCHT Biotechnology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Changchun BCHT Biotechnology has net cash of CN¥327.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 265% over the last year. So we are not troubled with Changchun BCHT Biotechnology's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Changchun BCHT Biotechnology you should know about.

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.