Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Suzhou Zelgen Biopharmaceuticals Co.,Ltd. (SHSE:688266) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. 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. 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.
What Is Suzhou Zelgen BiopharmaceuticalsLtd's Net Debt?
As you can see below, at the end of September 2023, Suzhou Zelgen BiopharmaceuticalsLtd had CN¥851.8m of debt, up from CN¥490.9m a year ago. Click the image for more detail. However, it does have CN¥2.23b in cash offsetting this, leading to net cash of CN¥1.37b.
A Look At Suzhou Zelgen BiopharmaceuticalsLtd's Liabilities
The latest balance sheet data shows that Suzhou Zelgen BiopharmaceuticalsLtd had liabilities of CN¥1.05b due within a year, and liabilities of CN¥58.7m falling due after that. Offsetting these obligations, it had cash of CN¥2.23b as well as receivables valued at CN¥100.9m due within 12 months. So it can boast CN¥1.22b more liquid assets than total liabilities.
This surplus suggests that Suzhou Zelgen BiopharmaceuticalsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Suzhou Zelgen BiopharmaceuticalsLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Suzhou Zelgen BiopharmaceuticalsLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Suzhou Zelgen BiopharmaceuticalsLtd reported revenue of CN¥386m, which is a gain of 28%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Suzhou Zelgen BiopharmaceuticalsLtd?
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 Suzhou Zelgen BiopharmaceuticalsLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥377m and booked a CN¥279m accounting loss. But the saving grace is the CN¥1.37b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Suzhou Zelgen BiopharmaceuticalsLtd may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Suzhou Zelgen BiopharmaceuticalsLtd has 1 warning sign we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.