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. Importantly, Shanghai Junshi Biosciences Co., Ltd. (HKG:1877) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
View our latest analysis for Shanghai Junshi Biosciences
What Is Shanghai Junshi Biosciences's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 Shanghai Junshi Biosciences had CN¥1.33b of debt, an increase on CN¥915.7m, over one year. But it also has CN¥4.88b in cash to offset that, meaning it has CN¥3.55b net cash.
A Look At Shanghai Junshi Biosciences' Liabilities
According to the last reported balance sheet, Shanghai Junshi Biosciences had liabilities of CN¥1.84b due within 12 months, and liabilities of CN¥1.16b due beyond 12 months. On the other hand, it had cash of CN¥4.88b and CN¥535.0m worth of receivables due within a year. So it actually has CN¥2.42b more liquid assets than total liabilities.
This surplus suggests that Shanghai Junshi Biosciences has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shanghai Junshi Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shanghai Junshi Biosciences 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, Shanghai Junshi Biosciences made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 59%. To be frank that doesn't bode well.
So How Risky Is Shanghai Junshi Biosciences?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Shanghai Junshi Biosciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥3.0b of cash and made a loss of CN¥2.5b. Given it only has net cash of CN¥3.55b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Shanghai Junshi Biosciences that you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.