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 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. We can see that Shenzhen Chipscreen Biosciences Co., Ltd. (SHSE:688321) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Shenzhen Chipscreen Biosciences Carry?
The image below, which you can click on for greater detail, shows that at September 2023 Shenzhen Chipscreen Biosciences had debt of CN¥1.01b, up from CN¥792.0m in one year. However, it does have CN¥889.3m in cash offsetting this, leading to net debt of about CN¥120.0m.
A Look At Shenzhen Chipscreen Biosciences' Liabilities
The latest balance sheet data shows that Shenzhen Chipscreen Biosciences had liabilities of CN¥351.4m due within a year, and liabilities of CN¥1.07b falling due after that. Offsetting these obligations, it had cash of CN¥889.3m as well as receivables valued at CN¥167.5m due within 12 months. So its liabilities total CN¥365.5m more than the combination of its cash and short-term receivables.
Of course, Shenzhen Chipscreen Biosciences has a market capitalization of CN¥6.48b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Chipscreen Biosciences's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Shenzhen Chipscreen Biosciences wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to CN¥543m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Shenzhen Chipscreen Biosciences had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥123m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥358m of cash over the last year. So in short it's a really risky stock. 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 Shenzhen Chipscreen Biosciences that you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.