The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies BeiGene, Ltd. (NASDAQ:BGNE) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is BeiGene's Net Debt?

As you can see below, at the end of December 2023, BeiGene had US$886.0m of debt, up from US$538.1m a year ago. Click the image for more detail. However, it does have US$3.17b in cash offsetting this, leading to net cash of US$2.29b.

How Strong Is BeiGene's Balance Sheet?

According to the last reported balance sheet, BeiGene had liabilities of US$1.81b due within 12 months, and liabilities of US$457.8m due beyond 12 months. On the other hand, it had cash of US$3.17b and US$395.9m worth of receivables due within a year. So it can boast US$1.30b more liquid assets than total liabilities.

This surplus suggests that BeiGene has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that BeiGene has more cash than debt is arguably a good indication that it can manage its debt safely. 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 BeiGene 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, BeiGene reported revenue of US$2.5b, which is a gain of 74%, 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 BeiGene?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year BeiGene had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$1.8b and booked a US$882m accounting loss. However, it has net cash of US$2.29b, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, BeiGene may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with BeiGene .

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.