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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Berry Genomics Co.,Ltd (SZSE:000710) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Berry GenomicsLtd
How Much Debt Does Berry GenomicsLtd Carry?
As you can see below, at the end of September 2023, Berry GenomicsLtd had CN¥337.8m of debt, up from CN¥267.1m a year ago. Click the image for more detail. However, it does have CN¥291.2m in cash offsetting this, leading to net debt of about CN¥46.7m.
A Look At Berry GenomicsLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Berry GenomicsLtd had liabilities of CN¥749.6m due within 12 months and liabilities of CN¥141.3m due beyond that. Offsetting these obligations, it had cash of CN¥291.2m as well as receivables valued at CN¥1.08b due within 12 months. So it can boast CN¥477.3m more liquid assets than total liabilities.
This surplus suggests that Berry GenomicsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Berry GenomicsLtd has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is Berry GenomicsLtd's earnings that will influence how the balance sheet holds up in the future. 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.
Over 12 months, Berry GenomicsLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 13%. That's not what we would hope to see.
Caveat Emptor
While Berry GenomicsLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥237m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. 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. Case in point: We've spotted 1 warning sign for Berry GenomicsLtd 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.