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.' 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. We can see that Tasly Pharmaceutical Group Co., Ltd (SHSE:600535) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Tasly Pharmaceutical Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Tasly Pharmaceutical Group had CN¥2.62b of debt in March 2024, down from CN¥3.31b, one year before. However, it does have CN¥4.86b in cash offsetting this, leading to net cash of CN¥2.24b.

How Strong Is Tasly Pharmaceutical Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tasly Pharmaceutical Group had liabilities of CN¥2.85b due within 12 months and liabilities of CN¥1.69b due beyond that. Offsetting these obligations, it had cash of CN¥4.86b as well as receivables valued at CN¥2.78b due within 12 months. So it actually has CN¥3.10b more liquid assets than total liabilities.

This short term liquidity is a sign that Tasly Pharmaceutical Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Tasly Pharmaceutical Group boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Tasly Pharmaceutical Group saw its EBIT decline by 2.3% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Tasly Pharmaceutical Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tasly Pharmaceutical Group 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. Happily for any shareholders, Tasly Pharmaceutical Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tasly Pharmaceutical Group has CN¥2.24b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.6b, being 130% of its EBIT. So is Tasly Pharmaceutical Group's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Tasly Pharmaceutical Group , and understanding them should be part of your investment process.

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.