The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Genscript Biotech Corporation (HKG:1548) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Genscript Biotech Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Genscript Biotech had US$769.7m of debt, an increase on US$600.9m, over one year. But on the other hand it also has US$1.93b in cash, leading to a US$1.16b net cash position.

How Healthy Is Genscript Biotech's Balance Sheet?

The latest balance sheet data shows that Genscript Biotech had liabilities of US$494.8m due within a year, and liabilities of US$848.1m falling due after that. Offsetting this, it had US$1.93b in cash and US$217.4m in receivables that were due within 12 months. So it actually has US$802.5m more liquid assets than total liabilities.

This surplus suggests that Genscript Biotech is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Genscript Biotech boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Genscript Biotech'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.

Over 12 months, Genscript Biotech reported revenue of US$840m, which is a gain of 34%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Genscript Biotech?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Genscript Biotech lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$543m and booked a US$95m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$1.16b. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Genscript Biotech may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Genscript Biotech insider transactions.

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.