Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Dizal (Jiangsu) Pharmaceutical Co., Ltd. (SHSE:688192) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Dizal (Jiangsu) Pharmaceutical's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Dizal (Jiangsu) Pharmaceutical had CN¥540.5m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥816.9m in cash, so it actually has CN¥276.4m net cash.

How Strong Is Dizal (Jiangsu) Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Dizal (Jiangsu) Pharmaceutical had liabilities of CN¥544.7m due within a year, and liabilities of CN¥310.9m falling due after that. Offsetting these obligations, it had cash of CN¥816.9m as well as receivables valued at CN¥47.5m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Dizal (Jiangsu) Pharmaceutical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥18.7b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Dizal (Jiangsu) Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Dizal (Jiangsu) Pharmaceutical made a loss at the EBIT level, last year, it was also good to see that it generated CN¥1.3b in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Dizal (Jiangsu) Pharmaceutical'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. Dizal (Jiangsu) Pharmaceutical may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Dizal (Jiangsu) Pharmaceutical 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 Dizal (Jiangsu) Pharmaceutical has net cash of CN¥276.4m, as well as more liquid assets than liabilities. So we don't have any problem with Dizal (Jiangsu) Pharmaceutical's use of debt. 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. Be aware that Dizal (Jiangsu) Pharmaceutical is showing 2 warning signs in our investment analysis , 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.