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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Jiangsu Recbio Technology Co., Ltd. (HKG:2179) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 Jiangsu Recbio Technology Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Jiangsu Recbio Technology had debt of CN¥631.6m, up from CN¥233.0m in one year. However, its balance sheet shows it holds CN¥837.8m in cash, so it actually has CN¥206.1m net cash.

How Healthy Is Jiangsu Recbio Technology's Balance Sheet?

According to the last reported balance sheet, Jiangsu Recbio Technology had liabilities of CN¥444.2m due within 12 months, and liabilities of CN¥671.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥837.8m as well as receivables valued at CN¥38.6m due within 12 months. So its liabilities total CN¥239.0m more than the combination of its cash and short-term receivables.

Given Jiangsu Recbio Technology has a market capitalization of CN¥3.55b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Jiangsu Recbio Technology 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 ultimately the future profitability of the business will decide if Jiangsu Recbio Technology 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.

Given its lack of meaningful operating revenue, Jiangsu Recbio Technology shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Jiangsu Recbio Technology?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Jiangsu Recbio Technology had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥862m and booked a CN¥572m accounting loss. With only CN¥206.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Jiangsu Recbio Technology you should be aware of, and 1 of them is a bit unpleasant.

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.

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.