Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Zhejiang Orient Gene Biotech Co.,Ltd (SHSE:688298) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Zhejiang Orient Gene BiotechLtd's Debt?
As you can see below, at the end of September 2023, Zhejiang Orient Gene BiotechLtd had CN¥579.6m of debt, up from CN¥50.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥5.73b in cash, leading to a CN¥5.16b net cash position.
A Look At Zhejiang Orient Gene BiotechLtd's Liabilities
According to the last reported balance sheet, Zhejiang Orient Gene BiotechLtd had liabilities of CN¥847.8m due within 12 months, and liabilities of CN¥395.1m due beyond 12 months. Offsetting this, it had CN¥5.73b in cash and CN¥328.1m in receivables that were due within 12 months. So it actually has CN¥4.82b more liquid assets than total liabilities.
This surplus liquidity suggests that Zhejiang Orient Gene BiotechLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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 BiotechLtd 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 it is Zhejiang Orient Gene BiotechLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Zhejiang Orient Gene BiotechLtd made a loss at the EBIT level, and saw its revenue drop to CN¥824m, which is a fall of 91%. That makes us nervous, to say the least.
So How Risky Is Zhejiang Orient Gene BiotechLtd?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Zhejiang Orient Gene BiotechLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥1.6b and booked a CN¥372m accounting loss. Given it only has net cash of CN¥5.16b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Zhejiang Orient Gene BiotechLtd 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.