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. Importantly, Luzhou Bio-chem Technology Limited (SGX:L46) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Luzhou Bio-chem Technology

What Is Luzhou Bio-chem Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Luzhou Bio-chem Technology had debt of CN¥698.3m at the end of June 2019, a reduction from CN¥822.9m over a year. However, because it has a cash reserve of CN¥145.3m, its net debt is less, at about CN¥553.0m.

A Look At Luzhou Bio-chem Technology's Liabilities

The latest balance sheet data shows that Luzhou Bio-chem Technology had liabilities of CN¥554.5m due within a year, and liabilities of CN¥607.1m falling due after that. On the other hand, it had cash of CN¥145.3m and CN¥206.0m worth of receivables due within a year. So its liabilities total CN¥810.3m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥38.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt At the end of the day, Luzhou Bio-chem Technology would probably need a major re-capitalization if its creditors were to demand repayment. 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 Luzhou Bio-chem Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.