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.' 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 Lifecome Biochemistry Co.,Ltd. (SZSE:002868) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Lifecome BiochemistryLtd
How Much Debt Does Lifecome BiochemistryLtd Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Lifecome BiochemistryLtd had CN¥847.0m of debt, an increase on CN¥285.2m, over one year. On the flip side, it has CN¥220.3m in cash leading to net debt of about CN¥626.7m.
A Look At Lifecome BiochemistryLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Lifecome BiochemistryLtd had liabilities of CN¥662.3m due within 12 months and liabilities of CN¥544.1m due beyond that. Offsetting these obligations, it had cash of CN¥220.3m as well as receivables valued at CN¥139.9m due within 12 months. So its liabilities total CN¥846.1m more than the combination of its cash and short-term receivables.
Lifecome BiochemistryLtd has a market capitalization of CN¥3.81b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Lifecome BiochemistryLtd 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, Lifecome BiochemistryLtd reported revenue of CN¥493m, which is a gain of 43%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
While we can certainly appreciate Lifecome BiochemistryLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at CN¥127m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥462m of cash over the last year. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Lifecome BiochemistryLtd you should know about.
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.