Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Bloomage BioTechnology Corporation Limited (SHSE:688363) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Bloomage BioTechnology's Net Debt?

As you can see below, Bloomage BioTechnology had CN¥40.6m of debt at March 2024, down from CN¥302.8m a year prior. But it also has CN¥836.1m in cash to offset that, meaning it has CN¥795.6m net cash.

How Healthy Is Bloomage BioTechnology's Balance Sheet?

According to the last reported balance sheet, Bloomage BioTechnology had liabilities of CN¥902.6m due within 12 months, and liabilities of CN¥285.4m due beyond 12 months. Offsetting this, it had CN¥836.1m in cash and CN¥636.1m in receivables that were due within 12 months. So it actually has CN¥284.2m more liquid assets than total liabilities.

This state of affairs indicates that Bloomage BioTechnology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥28.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Bloomage BioTechnology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Bloomage BioTechnology's saving grace is its low debt levels, because its EBIT has tanked 33% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Bloomage BioTechnology's ability to maintain a healthy balance sheet going forward. 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. In the last three years, Bloomage BioTechnology created free cash flow amounting to 3.1% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Bloomage BioTechnology has CN¥795.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Bloomage BioTechnology's use of debt. 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. To that end, you should be aware of the 2 warning signs we've spotted with Bloomage BioTechnology .

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.