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.' 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, Bio-Thera Solutions, Ltd. (SHSE:688177) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Bio-Thera Solutions Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Bio-Thera Solutions had CN¥592.8m of debt, an increase on CN¥263.3m, over one year. However, because it has a cash reserve of CN¥462.5m, its net debt is less, at about CN¥130.2m.

How Strong Is Bio-Thera Solutions' Balance Sheet?

The latest balance sheet data shows that Bio-Thera Solutions had liabilities of CN¥879.0m due within a year, and liabilities of CN¥286.5m falling due after that. Offsetting this, it had CN¥462.5m in cash and CN¥112.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥590.9m.

Of course, Bio-Thera Solutions has a market capitalization of CN¥11.5b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Bio-Thera Solutions has virtually no net debt, 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 future earnings, more than anything, that will determine Bio-Thera Solutions'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.

In the last year Bio-Thera Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to CN¥711m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Bio-Thera Solutions still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥414m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥593m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Bio-Thera Solutions that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.