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.' 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. As with many other companies Zhejiang Orient Gene Biotech Co., Ltd. (SHSE:688298) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Zhejiang Orient Gene Biotech
What Is Zhejiang Orient Gene Biotech's Debt?
The image below, which you can click on for greater detail, shows that at March 2023 Zhejiang Orient Gene Biotech had debt of CN¥593.5m, up from none in one year. But on the other hand it also has CN¥7.24b in cash, leading to a CN¥6.65b net cash position.
How Strong Is Zhejiang Orient Gene Biotech's Balance Sheet?
We can see from the most recent balance sheet that Zhejiang Orient Gene Biotech had liabilities of CN¥1.83b falling due within a year, and liabilities of CN¥446.3m due beyond that. Offsetting these obligations, it had cash of CN¥7.24b as well as receivables valued at CN¥479.2m due within 12 months. So it can boast CN¥5.45b more liquid assets than total liabilities.
This excess liquidity is a great indication that Zhejiang Orient Gene Biotech's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Zhejiang Orient Gene Biotech boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zhejiang Orient Gene Biotech will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Zhejiang Orient Gene Biotech made a loss at the EBIT level, and saw its revenue drop to CN¥4.4b, which is a fall of 65%. To be frank that doesn't bode well.
So How Risky Is Zhejiang Orient Gene 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 Zhejiang Orient Gene Biotech lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥546m and booked a CN¥49m accounting loss. Given it only has net cash of CN¥6.65b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 1 warning sign with Zhejiang Orient Gene Biotech , and understanding them should be part of your investment process.
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.