The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Akeso, Inc. (HKG:9926) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Akeso

How Much Debt Does Akeso Carry?

As you can see below, at the end of December 2021, Akeso had CN¥849.3m of debt, up from CN¥192.4m a year ago. Click the image for more detail. But it also has CN¥2.65b in cash to offset that, meaning it has CN¥1.80b net cash.

How Strong Is Akeso's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Akeso had liabilities of CN¥655.7m due within 12 months and liabilities of CN¥869.8m due beyond that. Offsetting these obligations, it had cash of CN¥2.65b as well as receivables valued at CN¥281.2m due within 12 months. So it can boast CN¥1.40b more liquid assets than total liabilities.

This surplus suggests that Akeso has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Akeso boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Akeso can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

While it hasn't made a profit, at least Akeso booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Akeso?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Akeso had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥1.7b and booked a CN¥1.1b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.80b. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Akeso has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.