Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Chengdu Olymvax Biopharmaceuticals Inc. (SHSE:688319) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Chengdu Olymvax Biopharmaceuticals
How Much Debt Does Chengdu Olymvax Biopharmaceuticals Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Chengdu Olymvax Biopharmaceuticals had CN¥177.6m of debt, an increase on CN¥140.0m, over one year. But it also has CN¥350.3m in cash to offset that, meaning it has CN¥172.6m net cash.
A Look At Chengdu Olymvax Biopharmaceuticals' Liabilities
The latest balance sheet data shows that Chengdu Olymvax Biopharmaceuticals had liabilities of CN¥408.3m due within a year, and liabilities of CN¥157.6m falling due after that. Offsetting these obligations, it had cash of CN¥350.3m as well as receivables valued at CN¥493.3m due within 12 months. So it can boast CN¥277.7m more liquid assets than total liabilities.
This surplus suggests that Chengdu Olymvax Biopharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Chengdu Olymvax Biopharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Chengdu Olymvax Biopharmaceuticals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Chengdu Olymvax Biopharmaceuticals made a loss at the EBIT level, and saw its revenue drop to CN¥529m, which is a fall of 7.7%. We would much prefer see growth.
So How Risky Is Chengdu Olymvax Biopharmaceuticals?
Although Chengdu Olymvax Biopharmaceuticals had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥17m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 3 warning signs for Chengdu Olymvax Biopharmaceuticals that 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.