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 can see that Bloomage BioTechnology Corporation Limited (SHSE:688363) does use debt in its business. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Bloomage BioTechnology
What Is Bloomage BioTechnology's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2022 Bloomage BioTechnology had CN¥353.1m of debt, an increase on CN¥218.7m, over one year. However, its balance sheet shows it holds CN¥1.88b in cash, so it actually has CN¥1.53b net cash.
How Strong Is Bloomage BioTechnology's Balance Sheet?
We can see from the most recent balance sheet that Bloomage BioTechnology had liabilities of CN¥1.27b falling due within a year, and liabilities of CN¥342.9m due beyond that. On the other hand, it had cash of CN¥1.88b and CN¥497.8m worth of receivables due within a year. So it can boast CN¥765.8m more liquid assets than total liabilities.
This state of affairs indicates that Bloomage BioTechnology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥62.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Bloomage BioTechnology boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that Bloomage BioTechnology grew its EBIT at 11% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bloomage BioTechnology'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Bloomage BioTechnology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Bloomage BioTechnology created free cash flow amounting to 4.8% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Bloomage BioTechnology has net cash of CN¥1.53b, as well as more liquid assets than liabilities. And it also grew its EBIT by 11% over the last year. So we don't have any problem with Bloomage BioTechnology's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Bloomage BioTechnology's earnings per share history for free.
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.