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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Bloomage BioTechnology Corporation Limited (SHSE:688363) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?
You can click the graphic below for the historical numbers, but it shows that Bloomage BioTechnology had CN¥137.3m of debt in September 2023, down from CN¥353.1m, one year before. But on the other hand it also has CN¥1.20b in cash, leading to a CN¥1.06b net cash position.
A Look At Bloomage BioTechnology's Liabilities
We can see from the most recent balance sheet that Bloomage BioTechnology had liabilities of CN¥1.11b falling due within a year, and liabilities of CN¥265.8m due beyond that. Offsetting this, it had CN¥1.20b in cash and CN¥571.4m in receivables that were due within 12 months. So it can boast CN¥393.3m more liquid assets than total liabilities.
Having regard to Bloomage BioTechnology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥28.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Bloomage BioTechnology boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Bloomage BioTechnology's load is not too heavy, because its EBIT was down 27% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Bloomage BioTechnology 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Bloomage BioTechnology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Bloomage BioTechnology actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Summing Up
While it is always sensible to investigate a company's debt, in this case Bloomage BioTechnology has CN¥1.06b in net cash and a decent-looking balance sheet. So while Bloomage BioTechnology does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Bloomage BioTechnology .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.