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.' 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. Importantly, Genscript Biotech Corporation (HKG:1548) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Genscript Biotech

What Is Genscript Biotech's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Genscript Biotech had debt of US$806.4m, up from US$468.1m in one year. But it also has US$2.14b in cash to offset that, meaning it has US$1.34b net cash.

How Healthy Is Genscript Biotech's Balance Sheet?

According to the last reported balance sheet, Genscript Biotech had liabilities of US$437.9m due within 12 months, and liabilities of US$860.4m due beyond 12 months. Offsetting this, it had US$2.14b in cash and US$208.0m in receivables that were due within 12 months. So it can boast US$1.05b more liquid assets than total liabilities.

It's good to see that Genscript Biotech has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Genscript Biotech boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Genscript Biotech'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 Genscript Biotech wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$707m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Genscript Biotech?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Genscript Biotech lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$470m and booked a US$185m accounting loss. With only US$1.34b on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Genscript Biotech may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Genscript Biotech insider transactions.

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.