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. Importantly, Bilibili Inc. (NASDAQ:BILI) does carry debt. 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Bilibili

What Is Bilibili's Net Debt?

As you can see below, at the end of June 2022, Bilibili had CN¥18.4b of debt, up from CN¥8.56b a year ago. Click the image for more detail. But on the other hand it also has CN¥24.9b in cash, leading to a CN¥6.55b net cash position.

How Strong Is Bilibili's Balance Sheet?

The latest balance sheet data shows that Bilibili had liabilities of CN¥13.0b due within a year, and liabilities of CN¥17.6b falling due after that. Offsetting these obligations, it had cash of CN¥24.9b as well as receivables valued at CN¥1.43b due within 12 months. So its liabilities total CN¥4.21b more than the combination of its cash and short-term receivables.

Given Bilibili has a market capitalization of CN¥47.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Bilibili also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Bilibili 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.

Over 12 months, Bilibili reported revenue of CN¥21b, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Bilibili?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Bilibili lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥6.3b and booked a CN¥9.1b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥6.55b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Bilibili may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Bilibili .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.