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.' 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. We can see that Shenzhen Bioeasy Biotechnology Co., Ltd. (SZSE:300942) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shenzhen Bioeasy Biotechnology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shenzhen Bioeasy Biotechnology had debt of CN¥409.6m, up from CN¥360.2m in one year. However, its balance sheet shows it holds CN¥582.0m in cash, so it actually has CN¥172.4m net cash.

How Healthy Is Shenzhen Bioeasy Biotechnology's Balance Sheet?

The latest balance sheet data shows that Shenzhen Bioeasy Biotechnology had liabilities of CN¥141.7m due within a year, and liabilities of CN¥383.3m falling due after that. Offsetting this, it had CN¥582.0m in cash and CN¥93.3m in receivables that were due within 12 months. So it can boast CN¥150.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Bioeasy Biotechnology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shenzhen Bioeasy Biotechnology 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 you can't view debt in total isolation; since Shenzhen Bioeasy Biotechnology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shenzhen Bioeasy Biotechnology had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥247m. That's not what we would hope to see.

So How Risky Is Shenzhen Bioeasy Biotechnology?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Shenzhen Bioeasy Biotechnology 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¥110m and booked a CN¥82m accounting loss. But the saving grace is the CN¥172.4m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. 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. For instance, we've identified 2 warning signs for Shenzhen Bioeasy Biotechnology (1 is concerning) 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.

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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.