Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Bio-Thera Solutions, Ltd. (SHSE:688177) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Bio-Thera Solutions
How Much Debt Does Bio-Thera Solutions Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Bio-Thera Solutions had CN¥458.9m of debt, an increase on CN¥23.6k, over one year. However, its balance sheet shows it holds CN¥631.1m in cash, so it actually has CN¥172.2m net cash.
How Strong Is Bio-Thera Solutions' Balance Sheet?
We can see from the most recent balance sheet that Bio-Thera Solutions had liabilities of CN¥768.7m falling due within a year, and liabilities of CN¥339.7m due beyond that. On the other hand, it had cash of CN¥631.1m and CN¥100.8m worth of receivables due within a year. So it has liabilities totalling CN¥376.4m more than its cash and near-term receivables, combined.
Given Bio-Thera Solutions has a market capitalization of CN¥15.3b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Bio-Thera Solutions boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bio-Thera Solutions will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Bio-Thera Solutions made a loss at the EBIT level, and saw its revenue drop to CN¥534m, which is a fall of 33%. To be frank that doesn't bode well.
So How Risky Is Bio-Thera Solutions?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Bio-Thera Solutions had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥780m and booked a CN¥607m accounting loss. But at least it has CN¥172.2m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Bio-Thera Solutions , and understanding them should be part of your investment process.
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.